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15. Members’ remedies

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Publisher: Oxford University Press Print Publication Date: Mar 2019 Print ISBN-13: 9780198786634 Published online: Sep 2019 DOI: 10.1093/he/ 9780198786634.001.0001

Chapter: (p. 375) 15. Members’ remedies

Author(s): Lee Roach

Company Law Dr Lee Roach

15. Members’ remedies

DOI: 10.1093/he/9780198786634.003.0015

• Personal, corporate, and representative actions

• The statutory derivative claim

• The unfair prejudice petition

• The petition for winding up

Where the company, its directors, or members have engaged in some form of act or omission that has caused loss to a member or members, how can redress be obtained? The problem that arises is that, often, the parties who have caused the loss are the ones who have the ability to seek redress (usually through the company). Members, especially minority shareholders, who sustain loss due to the wrongdoer’s acts or omissions could, without the law’s aid, be left without a remedy. Where the wrongdoers have breached the

Introduction

15. Members’ remedies

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company’s constitution, the member may be able to sue for breach of contract, as was discussed at 5.3.4. Here, the focus is on three remedies1 provided under statute, namely:

1. the statutory derivative claim; 2. the unfair prejudice petition; and 3. the petition to wind up the company.

Figure 15.1 provides an overview of the key member remedies. However, before these statutory member remedies are discussed, it is important to note that a member may have a personal right to seek a remedy that is independent of these three statutory remedies (although overlaps may exist). (p. 376)

Figure 15.1 Members’ remedies

15.1 Personal, corporate, and representative actions

A member may be able to obtain redress for a wrong done to him by commencing a personal action in his own name:

• The constitution forms a contract between the company and its members, and between the members themselves.2 From this, it follows that a member can commence a personal action for breach of contract if certain provisions of the constitution are breached by the company or a fellow member.

• If a shareholders’ agreement exists, then a member has a personal right to commence a claim for breach of contract if that agreement is breached.

Shareholders’ agreements are discussed at 5.6.

• Statute may provide a member with a personal remedy where specific rights have been breached. For example, a person can apply to the court for an order rectifying the register of members if their name

15. Members’ remedies

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is, without sufficient cause, entered or omitted from the register of members.3

• Two of the statutory member remedies discussed in this chapter are examples of personal actions, namely the unfair prejudice petition and the petition to wind up the company.

• A director owes his duties to the company,4 and so a member cannot normally commence a personal claim for breach of duty (although as discussed at 15.2, he may have the right to bring a derivative claim on behalf of the company). However, there are highly limited instances where a director will owe a duty directly to a member and, in such a case, a member may commence a personal action against the director.

When a director owes a duty directly to the members is discussed at 10.1.2.2.

In many cases, a member will bring a personal action in order to obtain a remedy for himself. Where multiple members have suffered a loss, then each member can bring a separate personal action, or they can engage in a collective action.

15.1.1 Personal actions and corporate actions

A person may engage in an unlawful act or omission that causes loss to both the company and its members. In such a case, the company will have the right to bring an action against the wrongdoer, and the members will also likely have a personal right to sue the wrongdoer. The general rule is that, in such a case, both actions can proceed. (p. 377)

FACTS: The articles of Direct United States Co Ltd (‘DUS’) provided that its members would have one vote for every 10 shares, up to a maximum of 100 votes. Consequently, members with over 1,000 shares would not have voting power commensurate to their shares. To avoid this, members with over 1,000 shares (of which Pender was one) transferred some of their excess shares to several nominees, thereby unlocking the votes within them. DUS’s chair (Lushington) refused to accept the nominees’ votes, resulting in a resolution tabled by Pender being defeated. Pender alleged that his votes were improperly rejected and brought a representative action on behalf of himself and the other members whose votes were rejected, and commenced a derivative action on behalf of DUS.

Pender v Lushington (1877) 6 ChD 70 (Ch)

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HELD: Jessel MR stated that the shares were properly transferred and registered to the nominees, so refusing to accept that their votes constituted a breach of the articles. He went on to state that Pender had a right to sue on this breach himself and on behalf of DUS. An injunction was granted restraining the rejection of the nominees’ votes.

However, there is a major exception to this principle in the form of the ‘no reflective loss’ principle, which can serve to prevent the member’s claim from proceeding.

15.1.1.1 The no reflective loss principle

Consider the following (fictitious) example.

The directors of Dragon plc commit an act of negligence that causes the company financial loss. As a result, Dragon issues a profit warning, stating that it does not expect to make a profit this financial year and abandons its plans to pay a dividend. Following the announcement, the value of the company’s shares decreases significantly. Marc, a member of Dragon, wishes to commence a personal claim against the directors involved for the losses he has sustained.

In this example, the directors’ negligence has caused loss to both Dragon and its members, with both having a personal cause of action against the directors. However, it is likely that the members will not be able to recover their losses from Dragon due to what is known as the no reflective loss principle, which provides that the members cannot sue a person for losses sustained if those losses are merely reflective of losses sustained by the company and which could be recovered by the company. In the example above, the loss sustained by Marc (and the other members) is merely reflective of the loss sustained by Dragon, and Dragon could recover this loss by suing the directors. In such a case, the company is the proper claimant (which, as discussed later, is the first principle of the rule in Foss v Harbottle) and its claim will generally ‘trump that of the shareholder’,5 as the following case demonstrates.

The rule in Foss v Harbottle is discussed at 15.2.1.

The ‘no reflective loss’ principle

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(p. 378)

FACTS: Bartlett and Laughton were directors of two companies, namely Newman Industries Ltd (‘Newman’) and Thomas Poole & Gladstone China Ltd (‘TPG’). TPG was experiencing financial difficulties and so Bartlett and Laughton devised a scheme to sell TPG’s assets to Newman. The valuation of the assets was based on misleading information provided by Bartlett and Laughton, with the result that Newman paid £445,000 more for the assets than it need have paid. The Listing Rules required that the shareholders of Newman approve the sale, and such approval was obtained, again based on misleading information provided by Bartlett and Laughton. Upon discovering the deception, Prudential Assurance Co Ltd (‘Prudential’), which held 3.2 per cent of shares in Newman, commenced proceedings against Bartlett, Laughton, and TPG via three different claims:

(i) a derivative claim on behalf of Newman for the losses sustained by Newman; (ii) a personal action against the defendants for the losses it sustained; and (iii) a representative action on behalf of all the other members of Newman.

At first instance,6 it was held that the defendants had indeed perpetrated a fraud and that the derivative and personal claims could be joined in one action. Bartlett and Laughton appealed.

HELD: The appeal was allowed in part. The Court of Appeal stated that the personal claim brought by Prudential was ‘misconceived’7

and that a member cannot:

recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only ‘loss’ is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding. The plaintiff’s shares are merely a right of participation in the company on the terms of the articles of

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (CA)

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association. The shares themselves, his right of participation, are not directly affected by the wrongdoing.8

Whether Prudential had the right to bring a derivative action did not form a ground of appeal and so the Court did not rule on this.

See LS Sealy, ‘A Setback for the Minority Shareholder’ (1982) 41 CLJ 247.

Prudential was regarded as a controversial decision at the time and was criticized strongly, with Sealy stating that ‘to describe the judgment as disappointing would be a major understatement’9 before stating that ‘the court washed its hands of all concern and responsibility for the control of corporate fraud, airily passing the buck to the City and the legislature with a disdain reminiscent of Pilate himself’.10 Despite the criticism, the rule is now well established, with its rationale being set out by Lord Millett:

If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted … Justice to the defendant requires the (p. 379) exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholders.11

The no reflective loss principle tries to strike a balance between two potentially competing aims, as identified by Lord Bingham:

On the one hand the court must respect the principle of company autonomy, ensure that the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation.12

The following case demonstrates this balancing act in practice and provides useful clarification on the scope of the no reflective loss principle. (p. 380)

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FACTS: Johnson was managing director and majority shareholder in Westway Homes Ltd (‘Westway’). On Westway’s behalf, he instructed Gore Wood & Co (‘GW’) to act as solicitors for Westway in relation to a purchase of land. Westway alleged that GW acted negligently and so commenced proceedings against GW for professional negligence, with Johnson stating that he also intended to personally sue GW for the losses he sustained. The case between Westway and GW was eventually settled, but Johnson’s personal claim against GW proceeded. GW applied to have Johnson’s claim struck out, inter alia, on the ground that his losses were reflective of those sustained by Westway.

HELD: The Court reiterated the validity of the no reflective loss principle, with Lord Bingham stating, ‘[n]o action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company’.13 On this basis, one head of damage sought by Johnson (namely the diminution in the value of his pension and shareholding) was struck out as it was reflective of Westway’s loss. Lord Bingham did, however, state that a member could sue for a diminution in value of his shareholding if he had a cause of action, and the company suffered loss but had no cause of action to sue to recover that loss,14 but this was not applicable here. In relation to the other heads of damage sought by Johnson, Lord Bingham stated:

Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.15

Applying this, the Court held that most of the heads of damage sought by Johnson would not be struck out as they were separate and distinct losses to those sustained by the company (e.g. additional tax liabilities sustained by Johnson due to GW’s negligence). Such losses were not reflective of Westway’s loss.

Johnson v Gore Wood & Co (No 1) [2002] 2 AC 1 (HL)

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See Eilis Ferran, ‘Litigation by Shareholders and Reflective Loss’ (2001) 60 CLJ 245.

The no reflective loss principle applies to any situation where the company and members have a cause of action deriving from the same facts (even if their causes of action are different),16 and will generally prevent the member’s personal claim from proceeding ‘even if the company has failed or declined to make good that loss’.17 However, if the principal rationale behind the no reflective loss rule is to prevent double recovery, then there should be no objection to a member bringing a claim in cases where the company has declined to commence proceedings.18

The no reflective loss principle also applies where the member brings a personal claim in a non-member capacity (e.g. where he claims in his capacity as a creditor or an employee).19 This has been rightly criticized on the ground that it places members who are employees or creditors in a worse position than if they were not members.20

The no reflective loss principle is not absolute and the courts have crafted one exception, namely that where the defendant’s conduct leaves the company unable to commence proceedings, then a member may commence a personal claim, even if his loss is reflective of that of the company. (p. 381)

FACTS: Giles and Rhind were directors and shareholders of Surrey Hill Foods Ltd (‘SHF’). A dispute arose and the board of SHF decided that Rhind should leave the company. Terms were agreed for Rhind’s resignation, with one term being that the provisions of the shareholders’ agreement that existed between them would continue. Rhind set up a new company and, in breach of the shareholders’ agreement, he diverted a lucrative contract from SHF to his new company. SHF commenced proceedings against Rhind but, due to Rhind’s actions, SHF became insolvent and lacked the funds to continue the claim. Accordingly, Giles commenced a personal claim against Rhind for the reduction in the value of his shares caused by Rhind’s conduct. At first instance, Giles’s claim failed because his losses were merely reflective of SHF’s losses.22 Giles appealed.

HELD: The appeal was allowed and Giles was permitted to pursue his personal claim against Rhind. Waller LJ noted that in Johnson, Lord Bignham stated that if a company had no cause of action, then the shareholder could bring a claim, even if the loss was reflective. Waller LJ stated that ‘the same should be true of a situation in which the wrongdoer has disabled the company from pursuing that cause of action’.23 He justified this by stating that:

Giles v Rhind [2002] EWCA Civ 14282121

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It seems hardly right that the wrongdoer who is in breach of contract to a shareholder can answer the shareholder by saying ‘the company had a cause of action which it is true I prevented it from bringing, but that fact alone means that I the wrongdoer do not have to pay anybody’.24

See Andrew Bowen, ‘Giles v Rhind’ (2003) 65 Bus LB 1.

15.1.2 Representative actions and Group Litigation Orders

It may be the case that the actions of the company or its directors cause loss to multiple members. In such a case, the possibility of collective action exists. The UK does not have an American-style ‘class action’ system but, in relation to company law issues, Part 19 of the Civil Procedure Rules provides for two collective action mechanisms, namely the representative action and the Group Litigation Order (GLO). It should be noted that both of these actions are opt-in, so if the action is successful, only those claimants who opted in to the action will generally be entitled to a remedy.25

Where more than one person has the same interest in a claim, a representative action may be commenced by or against one or more of the persons who have the same interest as representatives of any other persons who have that interest.26 From this, it follows that where more than one member is wronged, a wronged member can (alone, or with other wronged members) commence proceedings on behalf of himself and other wronged members. Any judgment resulting from the claim is binding on all persons represented in the claim, and can be enforced against those not party to the claim with the court’s permission.27

Representative actions can be useful, but they cannot be used where the claimants seek differing remedies or where each claimant’s claim is based on materially different facts. For this reason, in recent years, there has been an increase in GLOs, although they still remain relatively rare.28

A GLO is a tool to facilitate the management of cases where multiple claims arise from common or related issues of fact or law.29 The claimants who opt in to the GLO will be entered onto a ‘group register’ and the claims will be heard by the court that made the GLO (thereby avoiding the need for multiple proceedings and the possibility of inconsistent outcomes). If the claim is successful, the judgment will be binding on all claimants on the group register, unless the court orders otherwise.30 The key difference between a representative action and a GLO is that, in the

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latter, each claimant on the group register brings an individual claim, whereas in the former, the claim is brought on behalf of others. The following provides an example of a successful GLO (albeit one brought by the employees of a company, and not its members): (p. 382)

In January 2014, Mr Skelton, an employee of WM Morrison Supermarkets plc (‘Morrisons’), uploaded a file to a file-sharing website that contained the personal details (e.g. names, addresses, phone numbers, bank details) of nearly 100,000 Morrisons’ employees. Upon learning of the data breach, Morrisons took steps to have the website taken down and it identified Skelton as the source of the leaked information (he was subsequently sentenced to eight years’ imprisonment for various offences).

The 5,518 employees of Morrisons whose data had been disclosed sought and obtained a GLO. They commenced proceedings against Morrisons alleging that Morrisons was personally liable for its own acts or omissions, and vicariously liable for the acts of Skelton. The High Court held that Morrisons was not personally liable, but it was vicariously liable for Skelton’s wrongdoing.31 Morrisons’ appeal to the Court of Appeal was dismissed,32 but it has stated it plans to appeal to the Supreme Court. Should this appeal be dismissed, Morrisons will be liable to pay the employees party to the GLO signification amounts in damages (the amount of compensation will not be determined until the appeal is resolved).

15.2 The statutory derivative claim

Consider the following example.

Stanley, the chief executive officer (CEO) of Dragon Goods Ltd (‘DG’) owns 75 per cent of its shares. He has personally appointed the other two directors to the board, with each owning 5 per cent of the company’s shares. The remaining shares are held by Katja, who runs a business that supplies goods to DG. Katja discovers that Stanley is also a director of a company that competes with DG, but DG’s other directors are unaware of this. Katja informs the other directors of Stanley’s conflict of interest and demands that action be taken.

Morrisons Supermarket and data protection

The rationale behind derivative proceedings

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Stanley has likely acted in breach of duty (namely, the s 175 duty to avoid conflicts of interest), but a director owes his duties to the company33 and only the company can generally commence proceedings for breach. Who can commence proceedings on behalf of the company is a matter for its articles, with the decision to commence proceedings on behalf of the company usually being vested in the board of directors.34 Accordingly, the other directors of DG could commence proceedings in DG’s name against Stanley, even if Stanley objected in his guise as majority shareholder.35

However, the other directors of (p. 383) DG may be reluctant to commence proceedings against Stanley as they owe him their jobs and he could use his majority holding to dismiss them if he so wished (although it could be argued that a failure to commence proceedings would not be in accordance with their s 172 duty).

The issue that concerns us here is whether a member (such as Katja) can commence litigation on the company’s behalf where the directors are unwilling to do so. If the articles expressly empower Katja to commence proceedings on behalf of the company, then the answer will be yes, but such provisions are extremely rare. The articles might empower the members collectively to commence proceedings, but this would be of no aid as Stanley is the majority shareholder. It has even been stated that the members have a power to commence proceedings on behalf of the company by passing an ordinary resolution, irrespective of what the articles state,36 but it is unlikely that this rule has survived the CA 2006 reforms in relation to derivative claims. Absent empowering article provisions, members generally have no right to litigate in the company’s name due to what is known as ‘the rule in Foss v Harbottle’ but, as is discussed at 15.2.2, an important exception does exist to this general rule, namely the derivative claim.

15.2.1 The rule in Foss v Harbottle

The rule in Foss v Harbottle is derived from the following case.

FACTS: Foss and Turton were shareholders of the Victoria Park Company (‘VPC’). They claimed that the directors of VPC (one of whom was Harbottle) had, in breach of duty, caused VPC to enter into a series of fraudulent transactions. Accordingly, Foss and Turton commenced proceedings ‘on behalf of themselves and all the other members of the corporation, except those who committed the injuries complained of’.37

HELD: Wigram VC stated that VPC ‘is an incorporated body, and the conduct with which the Defendants are charged in this suit is an injury not to the Plaintiffs exclusively; it is an injury to the whole corporation …’.38 He went on to state that Foss and Turton had

Foss v Harbottle (1843) 2 Hare 461

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assumed the right to sue on behalf of VPC, but ‘[i]t was not, nor could it successfully be, argued that it was a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation’.39 In the circumstances, there was nothing to prevent VPC itself from obtaining redress, so the claim failed.

It has been stated that the rule in Foss v Harbottle consists of two principles.40 The most significant principle to derive from Foss is that where a wrong is done to a company, the company is the proper claimant to seek redress. This ‘proper claimant principle’ was (p. 384) explained clearly by the Court of Appeal stating, ‘A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested.’41 The proper claimant principle is clearly a corollary of a company’s separate personality and has the advantage of preventing a multiplicity of claims. As Mellish LJ stated:

Looking to the nature of these companies, looking at the way in which their articles are formed, and that they are not all lawyers who attend these meetings, nothing can be more likely than that there should be something more or less irregular done at them— some directors may have been irregularly appointed, some directors as irregularly turned out, or something or other may have been done which ought not to have been done according to the proper construction of the articles. Now, if that gives a right to every member of the company to file a bill to have the question decided, then if there happens to be one cantankerous member, or one member who loves litigation, everything of this kind will be litigated; whereas, if the bill must be filed in the name of the company, then, unless there is a majority who really wish for litigation, the litigation will not go on. Therefore, holding that such suits must be brought in the name of the company does certainly greatly tend to stop litigation.42

If third parties were permitted to bring actions on behalf of the company, this could lead to multiple actions being brought against one person for the same wrong. As the Law Commission stated, ‘[a]s the company is, in law, a separate legal entity, it is the proper plaintiff where it has suffered injury, otherwise a defendant could face as many actions as there are shareholders’.43

The second principle is known as the ‘irregularity principle’ and provides that where some irregularity is committed, an aggrieved member cannot

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commence proceedings where the irregularity is one that can be ratified by a simple majority of the members. Again, quoting Mellish LJ:

if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes.44

The irregularity principle has several justifications. First, it upholds the principle of majority rule. Second, it upholds the general principle that the courts will not generally interfere in the internal matters of a company. As Wedderburn noted, ‘[t]he law had long recognised majority rule as a fundamental principle concerning corporations, so that there was no difficulty in expressing majority rule as the justification for the refusal to interfere in internal management’.45

(p. 385) The rule in Foss v Harbottle cannot be absolute, for reasons best explained by Lord Denning MR, who stated that if a company is:

defrauded by a wrongdoer, the company itself is the one person to sue for the damage …. But suppose it is defrauded by insiders who control its affairs—by directors who hold a majority of the shares— who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise the proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress.46

The judiciary’s response to allow for redress of this injustice was the creation of the derivative action.

15.2.1.1 The common law derivative action

A derivative action allowed a member to commence proceedings for a wrong done to the company. It was so called because the member was bringing an action based on rights derived from the company. This derivation is reinforced by the fact that, if the derivative action succeeded, the remedy was granted to the company, not to the member

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who brought the action. Historically, it has been stated that there were four instances where a derivative action could be brought:47

1. where the act complained of was illegal48 or ultra vires;49

2. where the act complained of infringed the personal rights of a member (e.g. the failure to provide sufficient notice of meetings,50

the failure to provide dividends in the manner provided for by the articles,51 or the improper rejection of votes);52

3. where the act complained of could only be done or sanctioned by the passing of a special resolution;53 and 4. where the act complained of constituted a ‘fraud on the minority’.

It was generally acknowledged that the only ‘true’ exception to Foss (and so the only ‘true’ derivative action) was the fraud on the minority exception. The reason for this is that the first three so-called exceptions did not concern rights vested in the company, but concerned personal rights belonging to the member. Accordingly, they were not ‘exceptions’ to Foss, but rather areas in which Foss had no application.

The fraud on the minority exception was created specifically for those instances in which those who control the company (including those having the right to commence litigation on the company’s behalf) have committed some form of fraud. ‘Fraud’ is (p. 386) defined widely to include actual fraud (e.g. a breach of the Theft Act 1968, or the Fraud Act 2006) and equitable fraud (e.g. conduct tainted with impropriety), although the courts have maintained that negligence, however gross, is not a fraud on the minority.54 Where an act of negligence benefits those who control the company, thereby tainting it with impropriety, this can constitute a fraud on the minority.55

A court would, however, deny a member a right to sue on behalf of the company, even if there was fraud on the minority, if it did not serve the interests of justice. Examples of cases in which a member has been denied the chance to bring a derivative action include where the conduct of the member seeking to sue is itself tainted by impropriety,56 or where the independent members (i.e. not the wrongdoer or the applicant) have already indicated that they do not wish there to be litigation on behalf of the company.57

Whilst the Law Commission agreed with the underlying approach of the rule in Foss v Harbottle (i.e. that members should rarely be able to commence actions for wrongs done to the company), it was also of the opinion that the rules relating to derivative actions had become ‘complicated and unwieldy’.58 As a result of the Law Commission’s recommendations (which were largely adopted by the Company Law Review Steering Group (CLRSG)), Pt 11 of the CA 2006 now allows for the making of a statutory derivative claim.

It is important to note that the provisions contained in Pt 11 do not have a marked effect on the rule in Foss v Harbottle itself; the proper claimant

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principle remains intact, but the irregularity principle is modified slightly. Under the common law, an act that could be ratified by the members could not found a derivative action. Under Pt 11, actual ratification/ authorization will result in a derivative claim being refused permission to continue,59 while potential ratification/authorization is a factor the court will take into account when determining whether to grant permission for the claim to continue.60

The provisions of Pt 11 now broadly replace the common law rules relating to when a derivative action may be brought. However, it should be noted that the CA 2006 does not expressly abolish the common law derivative action, and not all derivative actions fall within the scope of Pt 11. Notably, two forms of derivative action fall outside Pt 11 (namely multiple derivative actions and actions involving foreign companies) and so will continue to be subject to the common law rules. Both of these will be briefly discussed.

15.2.1.2 Multiple derivative actions

The statutory derivative claim is often referred to as the ‘ordinary derivative claim’ and applies where the derivative claimant is a member of the company that was wronged and is seeking redress on behalf of that company. Bearing this in mind, consider the following example. (p. 387)

Belinda and Ahmed are directors and the majority shareholders of Dragon Tools Ltd (‘DT’). They are also the directors of Mechanical Ltd (‘Mechanical’), a wholly-owned subsidiary of DT. Belinda and Ahmed act in breach of duty whilst acting as directors of Mechanical. Sally, a member of DT, wishes to obtain redress on behalf of Mechanical.

Here, the proper claimant is Mechanical, but Belinda and Ahmed are its directors, so it is unlikely to sue. DT, as the only member of Mechanical, could commence a derivative claim against Belinda and Ahmed, but this is unlikely as Belinda and Ahmed are also directors of DT. The issue is can Sally, a member of DT, commence derivative proceedings on behalf of Mechanical, even though she is not a member of Mechanical. Under the common law, the courts permitted derivative actions to be brought by non-members in limited cases,61 with such actions being known as ‘multiple’ or ‘double’ derivative actions. However, such actions do not appear to fall within the scope of the ordinary derivative claim under the CA 2006, and debate arose regarding whether multiple derivative claims were permissible under the CA 2006, with the following case providing the answer.

The multiple derivative action

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FACTS: Universal Project Management Services Ltd (‘UPMS’) and Pearce were the only two members of Askett Hawk Properties LLP (‘the LLP’). Fort Gilkicker Ltd (‘FG’) was set up by the LLP to engage in a property development, and the shares in FG were owned by the LLP. Pearce acted as a director of FG. UPMS alleged that, whilst Pearce was a director of FG, he misappropriated a business opportunity that belonged to FG and caused it to be diverted to another company that he controlled. UPMS sought to commence a derivative claim on behalf of FG (which would be a multiple claim as UPMS was not a member of FG), and the court had to determine whether to grant permission for the claim to continue. As part of this, the court had to determine whether multiple derivative actions survived the CA 2006 coming into force.

HELD: Briggs J stated that whilst the ordinary derivative action (i.e. where a member brought an action on behalf of a company he was a member of) was abolished by the CA 2006, ‘the 2006 Act did not do away with the multiple derivative action’.62 Accordingly, multiple derivative actions are not subject to the provisions of Pt 11 of the CA 2006, but continue to be subject to the common law rules. Applying this, Briggs J held that a fraud on the minority had been committed by Pearce and so permission to continue the action was granted.

COMMENT: Whilst the decision has undoubtedly brought clarity to this area of the law, it does mean that the common law rules and statutory rules are still both in place. Briggs J acknowledged the inadequacy of this, stating that:

(p. 388) A conclusion that what Parliament in fact achieved in 2006 was to place a statutory code for derivative claims by members of the wronged company alongside a continued obscure, complicated and unwieldy common law regime for derivative claims by others does not commend itself as an exercise in commonsense.63

It has therefore been argued that clarity should be restored by extending the scope of Pt 11 to cover multiple derivative actions.64

See Tan Cheng-Han, ‘Multiple Derivative Actions’ (2013) 129 LQR 337.

Re Fort Gilkicker Ltd [2013] EWHC 348 (Ch)

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15.2.1.3 Claims involving foreign companies

The provisions relating to the statutory derivative claim apply ‘to proceedings in England and Wales or Northern Ireland by a member of the company’.65 The courts have interpreted this to mean that the provisions of Pt 11 only apply to companies registered under the CA 2006, and therefore the common law rules relating to derivative actions will continue to apply to claims involving foreign companies.66

15.2.2 Scope of the statutory derivative claim

Section 260(1) defines a derivative claim as one brought by a member in respect of a cause of action vested in the company, seeking relief on behalf of the company. From this definition, several consequences follow:

• The claim must be brought by a member. However, for the purposes of Pt 11, this will include a person who is not a member, but to whom shares in the company have been transferred or transmitted by operation of law67 (e.g. where shares are inherited). If a person ceases to be a member, he will lose the right to commence derivative proceedings, even if the cause of action arose whilst he was a member.

• The cause of action must be vested in the company. Where the cause of action is vested personally in the member only, then derivative proceedings cannot be brought. However, a director’s act or omission may result in an action being vested in the company and a personal action belonging to the member. In such a case, derivative proceedings can proceed (and may eclipse the member’s personal action due to the no reflective loss principle).

The no reflective loss principle is discussed at 15.1.1.1.

• As the member is seeking relief on behalf of the company, any benefits obtained because of the claim accrue to the company and not to the derivative claimant. To ensure that the company can enforce the judgment, the Civil Procedure Rules provide that the company must be made a defendant to the claim.68

• As the cause of action vests in the company, it is immaterial whether the cause of action occurred before or after the derivative claimant became a member.69

The actions of a member could found a common law derivative action,70

but a statutory derivative claim can only be based on the act or omission of a director71 (which includes shadow directors and former directors).72

Despite this, a derivative claim (p. 389) may be brought against a director or another person (or both).73 However, a claim could only be brought against a person other than the director ‘in very narrow circumstances,

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where the damage suffered by the company arose from an act involving a breach of duty etc on the part of the director (e.g. for knowing receipt of money or property transferred in breach of trust or for knowing assistance in a breach of trust)’.74 In other words, a claim can only be brought against a third party who is in some way connected to the director’s act or omission, as the following example demonstrates.

Walter is a director of Dragon Tools Ltd (‘DT’). Whist acting for DT, he informs one of DT’s customers that the goods sold by ST can be obtained more cheaply from Ember Ltd. The client stops buying goods from DT and instead obtains the goods from Ember. Ankur, a member of DT, discovers this and also discovers that Walter is the sole director and shareholder of Ember.

Walter will likely be in breach of the duty to avoid conflicts of interest contained in s 175 of the CA 2006. Ankur could commence a derivative claim against Walter, and he could also commence a derivative claim against Ember on the ground that it ‘dishonestly assisted in a breach of fiduciary duty’.75

15.2.2.1 Grounds for a derivative claim

A derivative claim can only be brought under Pt 11 of the Act, or in pursuance of a court order under s 994.76 Not all causes of action vested in the company are subject to derivative proceedings, with s 260(3) providing that a claim can only arise from an actual or proposed act or omission by a director involving:

• Negligence: Negligence could not found a common law derivative action unless the wrongdoer gained some form of benefit from the negligent act. This limitation is not preserved by the Act, leading to a concern from directors that the number of derivative claims will substantially increase. The Law Commission branded this concern as ‘overstated’,77 and it has been proven correct as the number of derivative claims has been low.

• Default: ‘Default’ is a general term used in many pieces of legislation that refers to a failure to perform a legally obligated act (e.g. obtain member approval for transactions under Pt 10, Ch 4 of the CA 2006). Accordingly, this is a rather broad term that will cover a breach of many statutory obligations.

• Breach of duty: Accordingly, a member will have standing to commence a derivative claim for breach of the general duties discussed in Chapters 10 and 11.

Derivative claims and third parties

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• Breach of trust: A ‘breach of trust’ occurs where a trustee engages in some form of improper act in relation to trust property, or breaches a duty placed upon him in relation to his position as a trustee. Directors can be trustees and so will be subject to duties in relation to trust property (e.g. property of the company).

(p. 390) 15.2.3 The derivative claim process

A derivative claim starts when the derivative claimant issues a claim form.78 Section 261(1) of the CA 2006 provides that a member who brings a derivative claim must apply to the court for permission to continue it. Accordingly, at the same time that the claim form is issued, the claimant must also file an application notice for permission to continue the claim along with the written evidence in support of his permission application.79 The claimant must notify the company of the claim, unless notifying the company would be likely to frustrate some part of the remedy sought, in which case the court can order that the company need not be notified for a specified period.80

The principal hurdle for a derivative claimant is obtaining permission from the court to continue the claim, with ss 261–4 establishing a two- stage process for determining whether permission should be granted. Figure 15.2 sets out this two-stage process.

Figure 15.2: The process for determining whether to grant permission Source: Roach, Concentrate Company Law (5th edn, OUP 2018).

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(p. 391) 15.2.3.1 Stage 1: establishing a prima facie case

Under the first stage, the member must establish that there is a prima facie case for the granting of permission to continue the claim.81 This stage occurs without the company’s involvement and the claimant must not make the company a respondent to the application at this stage.82 The court will consider the claimant’s application for permission to continue the claim and, if a prima facie case is not established, the court must dismiss the claim and can make any consequential order that it considers appropriate.83 The purpose of the prima facie test is to save time and expense by screening out unmeritorious or weak claims before the company and defendant become involved. Lewison J stated that establishing a prima facie case ‘necessarily entails a decision that there is a prima facie case both that the company has a good cause of action and that the cause of action arises out of a directors’ default, breach of duty (etc)’.84 The majority of cases to date have successfully established a prima facie case, so it appears that establishing a prima facie case is not an especially difficult hurdle to overcome.

If the member establishes that he has a prima facie case, then the court may give directions to the company as to the evidence that it must produce and may adjourn the proceedings to allow such evidence to be obtained.85 The claim will then move onto the second stage, in which the court will decide whether to grant permission to proceed. This second stage can itself be sub-divided into two parts (which this text labels 2A and 2B), with the first part being referred to as the ‘mandatory test’.

15.2.3.2 Stage 2A: the mandatory test

The first part of the stage 2 test can be found in s 263(2), which provides that permission to continue the claim must86 be refused in three circumstances. The first is where the court is satisfied that a person acting in accordance with s 172 (duty to promote the success of the company) would not seek to continue the claim.87 Guidance as to what factors might be relevant in determining this include:

The s 172 duty is discussed at 10.3.

such matters as the prospects of success of the claim, the ability of the company to make a recovery on any award of damages, the disruption which would be caused to the development of the company’s business by having to concentrate on the proceedings, the costs of the proceedings and any damage to the company’s reputation and business if the proceedings were to fail.88

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Further factors that might be relevant include:

the size of the claim; the strength of the claim; the cost of the proceedings; the company’s ability to fund the proceedings; the ability of the potential defendants to satisfy a judgment; the impact on the company if it lost the claim and had to pay not only its own costs but the defendant’s as well; any disruption to the company’s activities while the claim is pursued; whether the prosecution of the claim would damage the company in other ways (e.g. (p. 392) by losing the services of a valuable employee or alienating a key supplier or customer) and so on.89

In practice, refusal of permission to continue on this ground is likely to be rare, as the court has stated that the weighing of the above considerations ‘is essentially a commercial decision, which the court is ill- equipped to take, except in a clear case’90 and therefore s 263(2)(a) ‘will apply only where the court is satisfied that no director acting in accordance with section 172 would seek to continue the claim’.91

The second circumstance where permission to continue must be refused is where the cause of action arises from an act or omission that is yet to occur, and the act or omission has been authorized by the company.92

Where statute provides no rules on authorization, then authorization will be governed by the common law rules,93 which typically involve obtaining the consent of the members in general meeting. Where specific rules on authorization apply, then these must be complied with, as the following example demonstrates.

Nancy is a director of Dragon plc. She has been offered a role as a non-executive director (NED) of Sterling plc, a company that supplies goods to Dragon. Nancy informs the board of Dragon of the job offer, and the board agrees that she can have two days off per month to act as NED for Sterling (the articles of Dragon provide that the board can authorize conflicts of interest). Sally, a member of Dragon, discovers this and commences a derivative claim on behalf of Dragon in which she seeks an injunction preventing Nancy from taking the job.

Nancy acting as a director for Sterling might place her in a conflict- of-interest situation, as Sterling does business with Dragon. However, the s 175 duty to avoid a conflict of interest will not be breached if the director obtains authorization which, in a public company, can be given by the directors if the constitution so provides.94 Accordingly, the relevant act has been authorized and so permission to continue the claim would be refused (given that authorization was granted, it is

Refusal of permission due to authorization

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also probably the case that no breach of duty has occurred, and so the case may not even make it past the prima facie stage).

The final circumstance where permission to continue must be refused is where the cause of action arises from an act or omission that has already occurred, and the act or omission was authorized by the company before it occurred or has been ratified by the company since it occurred.95 What amounts to authorization here is the same as under s 263(2)(b) discussed above. The law relating to ratification can be found in s 239 of the CA 2006, which essentially requires an ordinary resolution to be passed. Prior to the passing of the CA 2006, the director whose behaviour was being ratified could vote on the ratification resolution (providing that he was a member and was acting in good faith).96 Under the CA 2006, where the director is also a member, then his votes (and (p. 393) those of members connected to him) will be disregarded,97 although if the vote takes place at a company meeting, he may attend and will be counted towards the quorum.98

Ratification under s 239 is discussed in more detail at 10.1.3.3.

15.2.3.3 Stage 2B: the discretionary test

If the claim does not fall foul of the mandatory test, it can progress onto the second part of stage 2, which can be termed the ‘discretionary test’. Here, the courts will determine whether permission should be granted for the claim to continue, but the standard that the claim must meet is not clear. Lewison J stated that ‘I do not consider that at the second stage this is simply a matter of establishing a prima facie case … because that forms the first stage of the procedure.’99 However, it has been argued that the prima facie test might still be relevant at stage 2 as ‘the court might revise its view as to a prima facie case once it has received evidence and argument from the other side …’.100 In the absence of such a revision, then it is clear that ‘[a]t the second stage, something more must be needed’101 than simply establishing a prima facie case, but it is not clear what this extra element is. It has been said that, at stage 2, it would be ‘quite wrong … to embark on anything like a mini-trial of the action’.102

However, Hannigan has argued that ‘[p]ractice appears to be veering towards the type of mini-trial at the permission stage which was so criticised when claims were governed by the common law and which was meant to be addressed by the statutory reforms’.103 It would appear that, at this stage, there is no threshold test on the merits of the case and the court will simply ‘do the best it can on the material before it’.104

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Limited guidance on the application of the discretionary test derives from s 263(3) and (4), which provides a non-exhaustive list of seven factors that the court must105 take into account when determining whether or not to grant permission. The first is ‘whether the member is acting in good faith in seeking to continue the claim’.106 In the majority of cases to date, this has been deemed a relevant factor, but establishing a lack of good faith has proven extremely difficult as the court has stated that ‘as long as there is a real purpose in bringing the proceedings’,107 then arguments based on a lack of good faith will not be maintained. Examples of situations where permission could be refused due a lack of good faith include where the claimant participated in the wrongdoing on which his claim is based,108 or where the claimant is pursuing an ‘ulterior motive unrelated to the subject matter of the litigation’.109 Examples of ulterior motives include where the claim (p. 394) was brought to further a familial dispute,110 or where a claim was brought to further the claimant’s interests as a creditor of the company.111 Note, however, that an ulterior motive for bringing a claim will not cause the claim to fail where the claim would benefit the company.112

The second factor is ‘the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to it’.113 It was noted at 15.2.3.2 that permission must be refused where a person acting in accordance with s 172 (duty to promote the success of the company) would not seek to continue the claim,114 and many of the factors relevant to s 263(2)(a) will also be applicable here in determining the importance attached to the claim. The following case provides a good example of a situation where little importance was attached to a claim.

FACTS: Mission Capital plc (‘MC’) had five directors, of which Emma and Ronald Sinclair (‘the Sinclairs’) were two. Their service contracts provided that their employment could be immediately terminated if they engaged in unacceptable conduct. MC terminated the Sinclairs’ employment on the grounds that they failed to submit financial information and failed to meet financial forecasts. The Sinclairs disputed this. MC obtained an injunction that excluded the Sinclairs from MC’s premises. The Sinclairs, inter alia, brought a derivative claim and sought permission to continue it.

COMMENT: Permission to continue the claim was refused. Floyd J stated:

Although I could not be satisfied that the notional section 172 director would not continue the claim, I do not believe that he would attach that much importance to it. Would a company

Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch)

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which had wrongfully dismissed a director normally take action against those responsible for the damage that it has suffered? It would depend, but I suspect that the action it would take in preference would be to replace the directors.115

The third factor is where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be, likely to be authorized or ratified,116 and the fourth factor is ‘where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company’.117

Section 263(2)(c) states that the court must refuse permission if actual authorization or ratification has taken place,118 but s 263(3)(c) and (d) indicate that potential authorization or ratification is a factor to be taken into account.

The fifth factor is ‘whether the company has decided not to pursue the claim’.119 The decision to litigate on the company’s behalf is usually taken by the directors, so the court (p. 395) here is assessing the directors’ decision to commence proceedings against one of their own. From this, it follows that a decision by the company not to commence a claim will carry ‘very little weight’120 where the defendant directors constitute the majority of the board. However, where the decision is independently taken and valid reasons exist not to commence proceedings, then this can result in permission being refused, as demonstrated in the following case.

FACTS: Paphitis was a director of Ryman Group Ltd (‘Ryman’). Paphitis discussed with Ryman’s other directors the possibility of Ryman acquiring La Senza, but the directors decided not to do so. Paphitis decided to acquire La Senza himself and he asked Ryman’s board if Ryman would lend funds to Xunely Ltd (a company controlled by Paphitis and which had two Ryman directors on its board), which would be used to acquire La Senza. Ryman’s board agreed and Xunely acquired La Senza. Kleanthous, a member of Ryman, claimed that Paphitis had committed a breach of duty by diverting a business opportunity away from Ryman and towards Xunely. Kleanthous commenced derivative proceedings on Ryman’s behalf against Paphitis and several other directors. Shortly after the claim was issued, Ryman set up a board committee, consisting of the two directors who were not defendants, to seek professional advice and make recommendations regarding the litigation. This committee concluded that ‘the negative effect on the Company’s businesses of the Company bringing or continuing a claim against the Defendant

Kleanthous v Paphitis [2011] EWHC 2287 (Ch)

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Directors greatly outweighs any benefit to the Company by pursuing the claim’. Negative effects included the likelihood of losing several experienced directors, as well as damaging the reputation of Paphitis, which would, in turn, damage the reputation of Ryman.121 Kleanthous sought permission to continue his derivative claim.

HELD: Permission to continue the claim was refused. Newey J attached ‘considerable weight’122 to the conclusion reached by the independent committee which ‘strongly opposed, on a reasoned basis’123 the claim from going ahead.

See Baljit Chohan, ‘Diggers and Dragons: Two Contrasting Cases on Directors’ Duties’ [2011] Corp Brief 7.

The sixth factor is ‘whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company’.124 A director’s act or omission might form the basis of a derivative claim, but it might also grant the member a personal action (e.g. unfair prejudice under s 994, or a breach of the s 33 contract). The key consideration is not whether an alternative remedy is available, but whether that alternative remedy is more appropriate—‘[t]he adequacy of the remedy available to the member in his own right is … a matter which will go into the balance when assessing the weight of this consideration on the facts of the case’.125 (p. 396)

FACTS: Medicentres (UK) Ltd (‘Medicentres’) was a wholly owned subsidiary of Franbar Holdings Ltd (‘Franbar’). Franbar sold 75 per cent of its shares in Medicentres to Casualty Plus Ltd (‘CP’). Franbar and CP entered into a shareholders’ agreement, under which Franbar appointed one director to Medicentres’ board and CP appointed two (namely Patel and du Plessis). Franbar commenced a derivative claim against CP, Patel, and du Plessis, alleging that the directors had breached their duties to Medicentres, and they had driven down Medicentres’ share price by driving business away from it. Based on the same facts, Franbar also claimed against CP for breach of the shareholders’ agreement and commenced an unfair prejudice petition against CP, Patel, and du Plessis.

HELD: Franbar was denied permission to continue the derivative claim. William Trower QC stated that ‘there is no aspect of the derivative claim for which Franbar cannot be compensated by relief

Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch)

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granted in the section 994 petition or the shareholders’ action …’.126

He went on to state:

I can see no reason why Franbar should not be granted such relief on the unfair prejudice petition as may be necessary to ensure that the interest which it seeks to realise is valued on a basis which takes full account of the value of the complaints it wishes to pursue on behalf of Medicentres in the derivative claim.127

Accordingly, ‘the availability (and indeed use) of both the section 994 petition and the shareholders’ action weigh in the balance against the grant of permission to continue the derivative action’.128

COMMENT: From this and other cases,129 it appears that if the remedy sought by the claimant under the derivative claim could also be obtained via an unfair prejudice petition, then the court will likely refuse permission to continue the derivative claim. However, refusal of permission to continue the claim under s 263(3)(f) is less likely to occur if the claimant has some appropriate reason for not seeking the alternative remedy (e.g. he wishes to remain a member of the company and so does not wish to bring an unfair prejudice petition, as the remedy afforded would likely be his shares being bought out).

The seventh and final factor is granted its own sub-section and provides that ‘the court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter’.130 The rationale behind this factor was stated by Knox J:

I remain unconvinced that a just result is achieved by a single minority shareholder having the right to involve a company in an action for recovery of compensation for the company if all the other minority shareholders are for disinterested reasons satisfied that the proceedings will be productive of more harm than good.131

However, the need for s 263(4) can be doubted on the ground that if the other members do not wish for the claim to proceed, they can simply ratify the director’s act, in which case permission to continue must be refused.132 The problem with this viewpoint is that it does not take into account how difficult authorization or ratification is to secure in (p. 397) larger companies. As Lord Hodgson stated when the Company Law Reform Bill was being debated, the inclusion of s 263(4) ‘will help to address concerns that it is not practicable or desirable for major quoted

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companies to ask shareholders formally to approve directors’ commercial decisions’.133

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15.2.3.4 Costs

A member considering commencing a derivative claim will need to consider the issue of costs. The CA 2006 provides no guidance on who pays the costs of a derivative claim, but the general rule in UK civil litigation is that the losing party pays his costs and the costs of the successful party.134 However, as regards derivative claims, this rule is problematic as the benefits of a successful claim go to the company and not the derivative claimant. Accordingly, if the claimant succeeds, the company benefits, but if he loses, he may be required to pay his costs and those of the other party. This would likely act as a significant disincentive to the bringing of derivative claims, and so the Court of Appeal stated that:

where a shareholder has in good faith and on reasonable grounds sued as plaintiff in a minority shareholder’s action, the benefit of which, if successful, will accrue to the company and only indirectly to the plaintiff as a member of the company, and which it would have been reasonable for an independent board of directors to bring in the company’s name, it would … clearly be a proper exercise of judicial discretion to order the company to pay the plaintiff’s costs.135

From this, it follows that the court has the discretion to order the company to pay the costs of a derivative claim, and this is reflected in the Civil Procedure Rules which state that ‘[t]he court may order the company, body corporate or trade union for the benefit of which a derivative claim is brought to indemnify the claimant against liability for costs incurred in the permission application or in the derivative claim or both’.136

Where a derivative claim is brought against a director, then the company may agree to pay the director’s costs. This could be regarded as a loan or a quasi-loan to the director and, as discussed, such transactions will normally require prior member approval. However, member approval is not required if, in the event of the director losing the case, the director repays the costs incurred by the company.137 In larger companies, directors may have their costs covered by professional indemnity insurance.

Loans and quasi-loans are discussed at 11.4.3.

15.3 The unfair prejudice petition

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Part 30 of the CA 2006 consists of a mere six sections, yet it provides what is perhaps the most important member remedy. It is worth noting at the outset that, for reasons discussed at 15.3.6.2, the unfair prejudice remedy is of increased importance to members of private companies (indeed, almost all the key cases involve private companies). Section 994(1) allows a member to petition the court for a remedy on the ground:

(a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally, or of some part of its members (including at least himself); or (p. 398) (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

Before discussing the unfair prejudice remedy, it is worth briefly looking at why the remedy was created and how it has evolved.

15.3.1 The oppressive conduct remedy

Prior to 1948, the only statutory remedy available to an aggrieved member was to petition the court for an order winding up the company. In many cases, such a drastic remedy would be inappropriate and so s 210 of the CA 1948 provided an ‘alternative remedy to winding up in cases of oppression’. The oppressive conduct remedy has been described as ‘a remarkable statutory innovation’138 but, in practice, only a few cases succeeded as the remedy was restrictively interpreted by the courts and a successful petition required the petitioner to show that the facts of the case would justify winding up the company.139 Accordingly, the Jenkins Committee recommended that the oppressive conduct remedy be replaced with a remedy based on unfairly prejudicial conduct, and a petitioner need not show that a winding up was justified140 Such a remedy was (eventually) introduced by s 75 of the CA 1980. Section 75 was largely re-enacted as s 459 of the CA 1985, and s 459 was largely re- enacted by s 994 of the CA 2006. Accordingly, case law decided under ss 75 and 459 remains relevant today.

15.3.2 The petitioner and respondent

It is important to understand who has legal standing to commence an unfair prejudice petition (the ‘petitioner’), and against whom an unfair prejudice petition may be commenced (the ‘respondent’).

15.3.2.1 Who may petition the court?

The following have standing to commence an unfair prejudice petition:

• Any member has standing to commence an unfair prejudice petition.141 This would include nominee members,142 as such persons fall within the definition of ‘member’ in s 112. Although s 994 was primarily designed for minority shareholders (and most petitions are

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brought by minority shareholders), a majority shareholder has standing to commence a petition,143 although, the court may refuse to grant a remedy if the majority shareholder could use his majority shareholding to remedy the conduct himself144 (e.g. by removing the directors).

Section 112 is discussed at 13.1.

• A person who is not a member may commence a petition if shares in the company have been transferred or transmitted to him by operation of law145 (e.g. a trustee in bankruptcy). (p. 399)

• In several circumstances (such as where he has received a report under s 437 of the CA 1985), the Secretary of State is empowered to commence an unfair prejudice petition.146 Such petitions are extremely rare and reported cases only appear to refer to one instance where such a petition was successful.147

• As ss 994–6 of the CA 2006 apply to limited liability partnerships (LLPs),148 a member of an LLP can also commence an unfair prejudice petition. However, the members of an LLP may by unanimous agreement exclude a member’s right to commence an unfair prejudice petition (in practice, the LLP agreements of most larger LLPs contain such an exclusion).

15.3.2.2 Against whom may a petition be brought?

As noted, s 994 allows a member to petition the court for a remedy on the ground:

(a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally, or of some part of its members (including at least himself); or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

There are, accordingly, two grounds on which to base a claim, and the two grounds are aimed at differing respondents. In Graham v Every,149

Arden LJ stated that (b) requires an act or omission of the company and therefore ‘the petitioner must identify something which the company does or fails to do’.150 Ground (a), however, is not subject to this limitation and so a claim on that ground can be based on the actions of other persons (notably directors or members). This means that, between the two grounds, claims can be brought against a range of persons including the

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company (or an LLP), directors, members,151 and even third parties (e.g. third parties who have ‘improperly assisted’152 in the act complained of). Most cases are either brought against a director (or directors) and/or a controlling member (or members).

Arden LJ noted that, irrespective of who the respondent is, the petitioner will need to demonstrate that the respondent’s conduct amounts to conduct of the company’s affairs.153 This is the first of several key phrases within s 994 that requires further discussion.

15.3.3 ‘The company’s affairs’

Section 994 applies where ‘the company’s affairs’ are being conducted in an unfairly prejudicial manner. From this, it follows that an s 994 petition will fail if it is brought against a member or director who is acting in a private capacity (i.e. in relation to his own affairs, and not those of the company). (p. 400)

FACTS: The four directors of Legal Costs Negotiators Ltd (‘LCN’) each held 25 per cent of LCN’s shares and were employees of LCN. Due to alleged mismanagement, one of the directors (Hateley) was dismissed as an employee and later resigned as a director. The other three directors offered to purchase Hateley’s shares at fair value, but Hateley refused. The three directors commenced an unfair prejudice petition against Hateley. They argued that LCN was a quasi- partnership and so there was a legitimate expectation that ‘each would contribute and continue to contribute to the company and be engaged full time on its business’.155 As Hateley was no longer a director or employee, he was in breach of this expectation and relief should therefore be granted (namely an order requiring Hateley to sell his shares). Hateley sought to have the petition struck out.

HELD: Peter Gibson LJ stated that Hateley’s ‘retention of those shares is not conduct of the company’s affairs …’.156 The alleged mismanagement of Hateley did concern the company’s affairs, but ‘that conduct had been terminated by his removal as employee and director’.157 Accordingly, the claim against Hateley was struck out.

See Robert Goddard, ‘An Oppressed Majority?’ (1999) 20 Co Law 241.

Re Legal Costs Negotiators Ltd [1999] BCC 547 (CA)154154

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Quasi-partnerships are discussed at 15.4.1.2.

However, it is important to note that what amounts to ‘the company’s affairs’ is highly fact-specific and an act or omission that might not normally be regarded as the company’s affairs might become so on the facts of the case, as the following case demonstrates. (p. 401)

FACTS: Graham and several other individuals were directors and members of Below Zero London Ltd (‘BZL’). The directors were not paid a salary, but were remunerated by way of dividend. A share pre- emption agreement existed between the members which provided that if a member wished to sell his shares, he was to first offer them to the existing shareholders pro rata. The relationship between Graham and the other directors soured and he was removed as a director. He commenced a s 994 petition stating that two of the respondents (one of which was Every) had not complied with the pre- emption agreement and had sold their shares to an outsider without first offering them to the existing shareholders. As he would have bought these shares if offered them,158 he argued that this amounted to unfairly prejudicial conduct. At first instance, Graham’s claim was struck out because breach of the pre-emption agreement did not amount to conduct of the affairs of the company. Graham appealed.

HELD: Graham’s appeal was allowed. Arden LJ noted that ‘a mere breach of a pre-emption agreement would not in itself constitute the conduct of the affairs of a company or an act of omission of the company within section 994’.159 However, as the directors were remunerated by way of dividend:

the size of a director’s shareholding would dictate his reward for his work on the Company’s business. How directors were to be remunerated and the Company’s distributions policy are within the conduct of the company’s affairs. So, by denying Mr Graham’s pre-emption right at a time when Mr Graham was still a director, Mr Every was arguably interfering with the way in which the parties had agreed that the Company would remunerate its directors.160

Graham v Every [2014] EWCA Civ 191

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See Andrew Bowen, ‘Unfairly Prejudicial Conduct, Pre-Emption Clauses and Good Faith’ (2014) 132 Bus LB 1.

In some cases, the courts have adopted a rather broad interpretation of what constitutes ‘the company’s affairs’, as the following case starkly demonstrates.

FACTS: Two brothers, Simon and Guy, were the only directors and members of Home and Office Fire Extinguishers Ltd (‘HOFE’). Simon asked Guy for an advance on his salary, but Guy refused as HOFE was struggling financially. A dispute resulted in a physical altercation between the brothers, with each alleging that the other attacked him with a hammer. Simon was charged with intent to cause grievous bodily harm and was prohibited from going near HOFE’s offices. Guy purported to terminate Simon’s employment. Simon was subsequently acquitted. Each commenced a s 994 petition against the other, seeking an order compelling the other to sell his shares.

HELD: Nicholas Strauss QC held that, based on the evidence, Simon had initiated the attack. He went on to state that Simon’s conduct related to the affairs of HOFE because his conduct ‘was a breach of the implied understanding that he and Guy, would act properly and in good faith towards each other, and it was also a single event which made it impossible for them to continue their association as directors of, and shareholders in, the Company’161 and it was ‘essentially a reaction to a decision taken by Guy concerning the Company’s finances’.162 Accordingly, Simon was ordered to sell his shares to Guy.

The final issue to be discussed is whether ‘the company’s affairs’ must refer to the company that the petitioner is a member of. The following case demonstrates that a member in a parent company may be able to bring a claim in relation to the activities of a subsidiary.163

FACTS: Gross and Rackind each held 50 per cent of the shares in Citybranch Ltd (‘Citybranch’) and were its only directors. The business of Citybranch was conducted entirely by three wholly owned subsidiaries (of which Gross and Rackind were also directors). A dispute arose and Rackind sought to wind up Citybranch. Gross

Re Home & Office Fire Extinguishers Ltd [2012] EWHC 917 (Ch)

Re Citybranch Group Ltd [2004] EWCA Civ 815

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responded by alleging that Rackind had breached his duties in relation to two of the subsidiaries and this unfairly prejudiced Gross’s interests as a member. Rackind argued that the petition should be struck out as the conduct complained of related to Citybranch’s subsidiaries and not Citybranch itself, and Gross was not a member of any of the subsidiaries.

(p. 402) HELD: Sir Martin Nourse stated that ‘the expression “the affairs of the company” is one of the widest import which can include the affairs of a subsidiary’.164 He went on to state, ‘I would hold that the affairs of a subsidiary can also be the affairs of its holding company, especially where, as here, the directors of the holding company, which necessarily controls the affairs of the subsidiary, also represent a majority of the directors of the subsidiary.’165 Accordingly, the court refused to strike out Gross’s petition.

COMMENT: Unsurprisingly, the decision has been criticized and it has been argued that the approach adopted in Citybranch ‘continues a judicial trend favouring rights and expectations of shareholders and disregarding the separate legal personality of companies’.166 The case also leaves many questions unanswered. For example, it was accepted that the four companies in Citybranch effectively operated a quasi- partnership, but it is not clear whether the ratio of Citybranch only applies to such companies.

See Robert Goddard and Hans C Hirt, ‘Section 459 and Corporate Groups’ [2005] JBL 247.

15.3.4 ‘Actual or proposed acts or omissions’

Most s 994 petitions are based on actual acts or omissions (i.e. those that have already occurred). In such case, the CA 2006 does not require that the petitioner was a member at the time the conduct in question occurred (e.g. a petition can be based on conduct that occurred before the petitioner became a member).167 However, in such a case, no petition can lie if the members consented to the conduct at the time it occurred.168

The oppressive conduct remedy under the CA 1948 did not allow a member to commence proceedings to prevent proposed oppressive conduct. Instead, he had to ‘sit idly by and wait for it to materialise before petitioning the court’.169 The problem with limiting the remedy to past acts was that if the act resulted in the company’s liquidation, then it would be too late for the situation to be rectified. This flaw has been remedied as s 994(1)(b) refers to a ‘proposed act’, clearly indicating that s 994 is not limited to acts that have already occurred. However, the

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courts have stated that ‘mere fears as to the future’170 cannot found the basis of an unfair prejudice claim.

The oppression remedy under the CA 1948 did not expressly cover omissions, but the House of Lords remedied this lacuna by stating that ‘the affairs of a company can … be conducted oppressively by the directors doing nothing to defend its interests when they ought to do something’.171 Section 994(1)(b) expressly states that omissions can constitute unfairly prejudicial conduct.

15.3.5 ‘Unfairly prejudicial’

For the petition to succeed, the conduct complained of must be ‘unfairly prejudicial’. The CA 2006 does not provide any guidance on what amounts to unfair prejudice apart from stating that a removal of a company’s auditor shall be regarded as unfair (p. 403) prejudice if the removal is on the grounds of divergence of opinions on accounting treatment or audit procedures, or any other improper grounds.172

Accordingly, what constitutes unfairly prejudicial conduct has been left to the courts to determine.

When determining whether conduct is unfairly prejudicial, the courts adopt an objective approach.173 As a result:

it is not necessary for the petitioner to show that the persons who have de facto control of the company have acted as they did in the conscious knowledge that this was unfair to the petitioner or that they were acting in bad faith; the test, I think, is whether a reasonable bystander observing the consequences of their conduct, would regard it as having unfairly prejudiced the petitioner’s interests.174

The courts have not sought to apply a technical or limited interpretation of the words ‘unfairly prejudicial’, and have stated that ‘[t]he words “unfairly prejudicial” are general words and they should be applied flexibly to meet the circumstances of the particular case …’.175 As the words ‘unfairly prejudicial’ are general words, the courts have not sought to impose a general standard or test, but it has been emphasized that the courts’ discretion must be judiciously exercised. In O’Neill v Phillips,176

Lord Hoffmann (who was involved in many of the major unfair prejudice cases) stated that Parliament chose the concept of fairness to:

free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied

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judicially and the content which it is given by the courts must be based upon rational principles ….177

The conduct complained of ‘must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest) and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct only satisfies one of these tests’.178 In the following case, the petition failed because the conduct complained of was unfair, but not prejudicial. (p. 404)

FACTS: Rock (Nominees) Ltd (‘Rock’) held 2.48 per cent of the shares in RCO (Holdings) plc (‘RCO’). As a result of a takeover, ISS Brentwood plc (‘Brentwood’) acquired 96.4 per cent of the shares in RCO. The purpose of the takeover was to acquire control of a wholly- owned subsidiary of RCO. Accordingly, it was agreed that the shares in the subsidiary would be sold to ISS (UK) Ltd (a member of the same corporate group as Brentwood). Four directors of RCO were also directors of ISS (UK) Ltd. Rock commenced an unfair prejudice petition, alleging that the shares in the subsidiary were sold at an undervalue and that the four directors were conflicted and so were in breach of their fiduciary duties.

HELD: The Court agreed with the first-instance judge, who stated that the four directors were ‘in a position of hopeless conflict’179 and so had breached their fiduciary duties. Accordingly, the directors had acted unfairly. However, looking at all the evidence, the Court was satisfied that the price paid for the subsidiary’s shares was ‘the best price reasonably obtainable’.180 Accordingly, ‘no harm was in fact done and no damage or prejudice caused’181 and so Rock’s petition was dismissed.

Conversely, in the following case, the conduct complained of was prejudicial, but not unfair.

FACTS: Hale and Waldock went into partnership. In 1994, they incorporated Metropolis Motorcycles Ltd (‘MM’), and it was decided to transfer the assets of the partnership to MM. In 1997, Hale moved away, leaving Waldock to largely manage the business by himself. Hale wished to return and, in 2000, it was agreed that Hale could draw £6,000 per month from the business’s profits, but Waldock

Rock (Nominees) Ltd v RCO (Holdings) plc [2004] EWCA Civ 118

Re Metropolis Motorcycles Ltd [2006] EWHC 364 (Ch)

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would continue to manage the business. Prior to the partnership‘s assets being transferred to MM in 2001, Waldock realized that the business’s finances had deteriorated. Hale only discovered the deterioration after he signed the agreement transferring the partnership’s assets to MM. Following the transfer, Waldock stopped Hale drawing from the company’s profits, and ran MM without any reference to Hale. Hale argued that, in failing to inform him of the deterioration of the business’s finances, Waldock misled him into signing the transfer agreement and this, along with stopping Hale’s drawings of profits, amounted to unfair prejudice.

HELD: Hale’s petition was dismissed. Mann J stated that ‘there are elements of prejudice to Mr Hale in the manner in which the company’s affairs have been conducted …’.182 However, he held that there was not the requisite level of unfairness, largely due to Hale’s ‘own decision to withdraw from active participation and to leave himself in essentially as an investor’.183

It has been stated that ‘[t]he requirement of prejudice means that the conduct must be shown to have done the members harm and I believe harm in a commercial sense, not in a merely emotional sense’.184 This does not mean that the harm sustained must be financial. For example, ‘[i]t may be enough to show that the rights of the petitioning member have been infringed without showing that that led to any financial loss’.185 Similarly, (p. 405) it has been held that, in a quasi-partnership, a breakdown in the partnership relationship can amount to unfair prejudice, even if no tangible harm has occurred.186 However, ‘[w]here the acts complained of have no adverse financial consequence, it may be more difficult to establish relevant prejudice’.187

It is clear from the above that determining whether unfair prejudice is present is strongly based on the facts of the case. As Lord Hoffmann stated, ‘[al]though fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family.’188 Examples of the type of conduct that could constitute unfair prejudice will now be discussed, but note that these categories are by no means exhaustive (and can overlap).

15.3.5.1 Serious mismanagement

In Re Elgindata Ltd,189 Warner J stated that ‘the court would ordinarily be very reluctant to accept that managerial decisions could amount to unfairly prejudicial conduct’.190 Accordingly, mismanagement will normally not amount to unfair prejudice. However, he went on to say, ‘I do not doubt that in appropriate cases it is open to the court to find that serious mismanagement of a company’s business constitutes conduct that

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is unfairly prejudicial to the interests of minority shareholders.’191 The following case provides such an example.

FACTS: The case concerned two companies involved in the business of letting residential properties and garages. Thompson was a director and shareholder in both companies. The petitioners were members of both companies and alleged that Thompson had engaged in serious mismanagement over a prolonged period.

HELD: Arden J listed the various forms of mismanagement that had occurred:

I am satisfied that the companies suffered prejudice in consequence of failure to have a planned maintenance programme, the failure to supervise repairs, the failure to inspect properties regularly, the failure to let on protected shorthold tenancies, the taking of commissions from builders doing work for the companies by employees of Thompson’s, the charging of excessive management charges and secretarial salary and the mismanagement of litigation.192

She went on to note that ‘several of the acts of mismanagement which the plaintiffs have identified were repeated over many years’193 and therefore held that ‘those acts (and Mr Thompson’s failures to prevent or rectify them) are sufficiently significant and serious to justify intervention by the court under [s 996]’.194

COMMENT: Thompson’s mismanagement would likely constitute a breach of duty. Accordingly, it has been argued that mismanagement will only amount to unfairly prejudicial conduct where the director in question breached the duties found in ss 172 or 174.195 However, the courts have repeatedly referred to serious mismanagement as a separate ground of unfair prejudice.

See John Lowry, ‘The Elasticity of Unfair Prejudice: Stretching the Ambit of the Companies Act 1985, s 459’ (1995) 3 LMCLQ 337.

Re Macro (Ipswich) Ltd [1994] 2 BCLC 354 (Ch)

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(p. 406) 15.3.5.2 Abuse of a controlling position

Many successful unfair prejudice petitions involve the directors or controlling shareholders abusing their position in some way. Very often, this will result in them improperly obtaining for themselves some form of advantage, usually at the expense of the minority shareholders. Examples include:

• where the directors of a company sell that company’s assets at an undervalue to another company they control;196

• where the directors of company A and company B transfer business from company A to company B in order to reduce the profits distributed to shareholders in company A;197

• where the directors urge the members to accept a takeover bid from a company in which they have a favourable interest, whilst misleading the members into rejecting a more favourable rival bid;198

• where the directors pay themselves excessive remuneration,199 or remuneration paid in breach of the company’s articles200 (such cases are often accompanied by the directors recommending low or no dividend payments);201

• where the directors and majority shareholders decide not to pay out a declared dividend and instead distribute the profits to themselves as management fees;202

• a failure to consider paying dividends,203 or a refusal to pay higher dividends for a prolonged period despite profits being available.204

15.3.5.3 Breach of directors’ duties

Several of the above cases concerning abuse of a controlling position involved directors acting in breach of their duties. For example, several cases involve directors who divert company assets or business to another company they control, which would likely be a breach of the duty to avoid conflicts of interest. Accordingly, it is clear that a breach of the general duties can amount to unfairly prejudicial conduct. However, it is important to note that most cases concerning breach of duty involve private companies and the courts appear more reluctant to hold that a breach of duty in a public company amounts to unfairly prejudicial conduct.205

15.3.5.4 Breach of statutory rights or the constitution

Breach of certain statutory rights or constitutional provisions may amount to unfairly prejudicial conduct, as the following case demonstrates.

(p. 407)

Re a Company (No 00789 of 1987) [1990] BCLC 384 (Ch)

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FACTS: Kelly was the controlling shareholder and chair of a company that ran a football club. Due to Kelly’s managerial failings, the company did not prepare proper financial accounts each year, and it failed to hold the required annual general meetings. Further, when extraordinary meetings were called, inadequate notice was provided and the statutory procedures for short notice were not complied with. A member commenced an unfair prejudice petition.

HELD: Harman J stated that the company’s affairs were ‘managed under Mr Kelly’s control with a very large near total disregard of the requirements of the Companies Act and of the articles …’.206

Consequently, the members ‘were wholly deprived of any opportunity to consider the affairs of the company, to vote on the election or re- election of directors, or in any other way to know what was going on’.207 This amounted to unfairly prejudicial conduct and so the court ordered that Kelly should sell his shares to the petitioner.

However, it is important to note that ‘trivial and technical infringements’ are not intended to give rise to an unfair prejudice petition.208 The rationale behind this was stated by Purle J:

isolated trivial complaints, even when in breach of some legal requirement, having no impact on the value of the petitioner’s shares, or upon any realistic objective assessment of the integrity and competence of the board, will not be visited by the threat of an unfair prejudice petition, but should be left to be dealt with by the regime of sanctions and other remedies the law provides.209

However, he did go on to state that where statute or the constitution lay down absolute standards, then the court should respect those ‘and not be too ready to dismiss anything other than minor, inadvertent departures as “trivial”’.210

15.3.5.5 Criminal conduct

Generally, the civil law cannot be used to enforce a breach of criminal law. This is because ‘[t]he criminal law is best enforced directly by courts of criminal jurisdiction, who have to try criminal cases in accordance with criminal procedure and in recognition of the protections afforded to a citizen by our system of criminal justice’.211 However, the courts have held that this general rule does not apply to unfair prejudice petitions,212

and so criminal conduct can amount to unfairly prejudicial conduct.

15.3.5.6 Exclusion from management

In some cases, excluding a member from participating in the management of a company can amount to unfair prejudice. The issue that

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arises here is whether a right to participate in management is regarded as a membership interest. This will be discussed next.

(p. 408) 15.3.6 ‘Interests of members’

The conduct must unfairly prejudice the ‘the interests of members generally or some part of its members (including at least [the petitioner])’. Defining the extent of the members’ interests has proven to be a complex issue that has generated a substantial body of case law. What is clear is that a member’s interests are wider than a member’s rights. The rights of a member are found in the relevant legislation and the company’s constitution, but a member’s interests go beyond this,213

as the following case demonstrates.

FACTS: Sam Weller & Sons Ltd (‘SW’), a small family-run company, had significant cash reserves, including over £464,000 in undistributed profits, but it had paid the same low dividend (14 pence per share) for the previous 37 years.214 SW had one director, Sam, who was paid a salary (his two sons were also employees of the company). The petitioners, who were members of the company, commenced an unfair prejudice petition alleging that, inter alia, the low dividend payments constituted unfairly prejudicial conduct. SW and Sam sought to strike out the petition on the ground that the dividend policy affected all the members equally, and so did not prejudice the petitioners.

HELD: The strike-out application was dismissed. Whilst a policy of low dividend payments did not breach the members’ rights, ‘[t]he word “interests” is wider than a term such as “rights” … Parliament recognised that members may have different interests, even if their rights as members are the same.’215 Peter Gibson J stated that it may be in the interests of Sam to retain the major part of the profits in order to enhance the value of his own shareholding, but his interests are not the same as those of other members and that:

It may well be in the interests of the other shareholders, including the petitioners, that a more immediate benefit should accrue to them in the form of larger dividends. As their only income from the company is by way of dividend, their interests may be not only prejudiced by the policy of low dividend payments, but unfairly prejudiced.216

COMMENT: This case is not authority for the proposition that the payment of low dividends will amount to unfairly prejudicial conduct. Peter Gibson J stated:

Re Sam Weller & Sons Ltd [1990] Ch 682 (Ch)

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I do not intend to suggest that a shareholder who does not receive an income from the company except by way of dividend is always entitled to complain whenever the company is controlled by persons who do derive an income from the company and when profits are not fully distributed by way of dividend …. I have no doubt the court will view with great caution allegations of unfair prejudice on this ground.217

However, here the facts of the case were ‘striking because of the absence of any increase in the dividend for so many years and because of the amount of accumulated profits and the amount of cash in hand’.218

(p. 409) It is important to note, however, that despite the breadth of the word ‘interests’, it must be the petitioner’s interests as a member that have been unfairly prejudiced. However, as 15.3.6.1–15.3.6.3 demonstrates, the courts have interpreted this requirement broadly.

15.3.6.1 Member qua member

An oppressive conduct petition would only be successful if the member brought the claim in his capacity as a member (this is often referred to as member qua member), and this requirement was enforced strictly. Whilst this requirement still exists in relation to the unfair prejudice remedy, the courts take a much more flexible and broad approach as to when a member is acting qua member. As Lord Hoffmann stated, ‘the requirement that prejudice must be suffered as a member should not be too narrow or technically construed’.219 For example, the courts have held that in quasi-partnership companies, the interests of a member might extend to holding office as a director.220 The following case provides a notable example of how flexibly the member qua member requirement has been applied.

qua: ‘in the capacity of’

FACTS: Gamlestaden Fastigheter AB (‘GF’) entered into a joint venture with a man named Karlsten. The venture operated through Baltic Partners Ltd (‘Baltic’). GF held 22 per cent of the shares in Baltic and, in order to finance the joint venture, it had also made

Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26221221

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substantial loans to Baltic over a two-year period. GF alleged that Karlsten and others had withdrawn substantial funds from the venture with the approval of Baltic’s directors, but that no consideration had been provided for the withdrawals. GF alleged that this constituted unfairly prejudicial conduct and argued that Baltic’s directors should compensate Baltic for the withdrawals that they authorized. At the time of the hearing, Baltic was insolvent and its directors therefore argued that the payment of compensation to Baltic would benefit GF in its capacity as a creditor, but would not benefit it in its capacity as a member and, as such, the conduct did not affect its interests as a member. At first instance, this was accepted and GF’s petition was struck out. GF appealed.

HELD: The Privy Council allowed GF’s appeal, with Lord Scott stating:

[I]n a case where an investor in a joint venture company has, in pursuance of the joint venture agreement, invested not only in subscribing for shares but also in advancing loan capital, the investor ought not … to be precluded from the grant of relief … on the ground that the relief would benefit the investor only as loan creditor and not as member.222

COMMENT: This case clearly demonstrates how flexibly the courts are prepared to apply the member qua member requirement, but it does not abolish it. Lord Scott stated that, in many cases, a failure to bring a claim qua member ‘might justifiably lead to a refusal of relief’.223 Another important point to note is that GF did not seek compensation for itself, but on behalf of Baltic. GF therefore enforced a right on behalf of Baltic, which would normally be prohibited by the rule in Foss v Harbottle. A prior derivative action had failed on the ground that the case did not come within any of the common law exceptions to Foss. To allow GF to use the unfair prejudice remedy to obtain relief for Baltic confirms that a principal reason for the remedy’s creation was to outflank the rule in Foss v Harbottle where fairness requires.

See Tony Singla, ‘Unfair Prejudice in the Privy Council’ (2007) 123 LQR 542.

(p. 410) The courts have, however, only been prepared to relax the member qua member rule so far and the courts will still require the petitioner’s interest to be sufficiently related to his membership. Thus, the courts have rejected claims where the petitioner has brought a claim

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in his capacity as an employee of the company,224 or where a claim is brought in the capacity of a freeholder of land upon which a business was run, as opposed to a member of the company that runs the business.225

15.3.6.2 Equitable considerations

The members may agree that the company is to be run in a certain way, but that agreement may never be formalized or inserted into the constitution (and so may not constitute a membership ‘right’). Hoffmann LJ referred to:

a fundamental understanding between the shareholders which formed the basis of their association but was not put into contractual form, such as an assumption that each of the parties who has ventured his capital will also participate in the management of the company and receive the return on his investment in the form of salary rather than dividend.226

The issue here is whether breach of such an informal agreement or understanding constitutes a membership interest. Hoffmann LJ stated that adherence to such agreements or understandings can constitute a ‘legitimate expectation’227 of the members that can form the basis of an unfair prejudice petition. Lord Hoffmann has since stated that use of the phrase ‘legitimate expectations’ was a mistake and instead the court is recognizing ‘equitable principles’ or ‘equitable considerations’.228 The only unfair prejudice petition to ever reach the House of Lords229

demonstrates the courts’ approach. (p. 411)

FACTS: Phillips was director of Pectel Ltd and owned all 100 of its shares. In 1985, he gave twenty-five shares to O’Neill (who was an employee) and made him a director. Phillips also retired from the board, leaving O’Neill as de facto managing director. Pectel’s profits were split between Phillips (75 per cent) and O’Neill (25 per cent), but Phillips voluntarily gave up 25 per cent of his profits, so that their share of the profits was equal. The possibility of increasing O’Neill’s shareholding to 50 per cent was also discussed, but never acted upon. In 1991, the business experienced difficulties and Phillips returned to oversee management. He offered O’Neill the opportunity to manage, under Phillips’s direction, either the English or German branch of the business—O’Neill chose the German branch. Later in the year, Phillips claimed to be entitled once again to receive 75 per cent of the profits and O’Neill left the company, claiming unfair prejudice. The Court of Appeal held that O’Neill had a legitimate expectation that he would

O’Neill v Phillips [1999] 1 WLR 1092 (HL)

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receive 50 per cent of the profits and would receive 50 per cent of the shares. Phillips appealed.

HELD: The House of Lords allowed Phillips’s appeal. Lord Hoffmann stressed that:

a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But … there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.230

On the facts, the House held that O’Neill had not been excluded from management, nor had Phillips promised to transfer any shares to O’Neill (even if O’Neill had hopes of such a transfer). Further, Phillips had not promised that O’Neill would always receive 50 per cent of the profits. Rather, O’Neill had, at most, been promised 50 per cent of the profits whilst he remained de facto managing director. Phillips had not breached the articles or memorandum, nor was there anything giving rise to the equitable considerations of which Lord Hoffmann spoke.

See Dan D Prentice and Jennifer Payne, ‘Section 459 and the Companies Act 1985: The House of Lords’ View’ (1999) 115 LQR 587.

O’Neill shows that the petitioner must demonstrate that the facts give rise to the equitable considerations of which Lord Hoffmann spoke. This will be largely determined by the type of company in question. In larger companies (especially public companies), it is highly unlikely that the members will have informal agreements or understandings in place, and even if they do, they are unlikely to be enforced. As Jonathan Parker J noted:

the concept of ‘legitimate expectation’ … can have no place in the context of public listed companies …. If the market in a company’s shares is to have any credibility, members of the public dealing in that market must it seems to me be entitled to proceed on the footing that the constitution of the company is as it appears in the

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company’s public documents, unaffected by any extraneous equitable considerations and constraints.231

It is likely that this rule will also apply to most small companies too.232

Equitable considerations are more likely to arise in quasi-partnerships, with the most common equitable consideration being a member’s right to be involved in the company’s management.

15.3.6.3 Exclusion from management

Although the category of equitable considerations is open-ended, the majority of unfair prejudice cases have involved members being excluded from management of a quasi-partnership. The exclusion from management is an excellent example of when equitable considerations will be relevant. In public companies and larger private companies, the members will have no expectations beyond those found in the company’s constitution233 and they will certainly not expect to participate in management (which is why most unfair prejudice cases involve private companies). Conversely, in quasi-partnerships, the members are likely to have an expectation that they will participate in management and so exclusion can amount to unfairly prejudice conduct. (p. 412)

FACTS: Betts agreed with three other persons to build a golf driving range, with each person agreeing to put £25,000 into the venture. A company, Ghyll Beck Driving Range Ltd (‘GB’), was incorporated with all four becoming directors and each holding one share. Two of the directors (including Betts) put in the £25,000 agreed, but the other two directors (the Padleys) did not and failed to contribute sufficiently to GB’s management due to business commitments elsewhere. This culminated in Betts and one of the Padleys having a physical altercation at the driving range. Thereafter, Betts was excluded from the management of GB and so he commenced an unfair prejudice petition against the other three directors.

HELD: Vinelott J stated that the Padleys had engaged in a dishonest attempt to escape making their full contribution and that one of the Padley’s manufactured evidence during the trial. Accordingly, he held that, following the altercation, Betts ‘could no longer trust his co- participants to deal fairly with him’234 and had been unfairly excluded from management. Accordingly, Betts’ petition succeeded and the respondents were ordered to purchase his shares.

The expectation to manage must be legitimate: a mere hope that the company’s affairs will be run in a certain way will be insufficient and the court will only seek to enforce what was actually agreed. As Lord

Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126 (Ch)

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Hoffmann stated, the unfair prejudice remedy ‘enables the court to give full effect to the terms and understandings on which the members of the company become associated but not to rewrite them’.235 Even if the petitioner does have an expectation to manage, the facts of the case may lead the court to conclude that his exclusion was not unfairly prejudicial, especially if his own actions contributed to his exclusion. (p. 413)

FACTS: Woolwich and three other persons formed a television production company called Twenty Twenty Productions Ltd (‘TT’). Woolwich had a reputation as a harsh taskmaster and had, on several occasions, engaged in bullying conduct towards TT’s employees. He was warned about his conduct by the other directors, and told that his conduct placed TT’s survival in jeopardy as it exposed TT to potential litigation. Despite this, he continued to engage in aggressive and intimidatory conduct towards the employees. A disciplinary hearing was called, but Woolwich did not attend. The other three directors used their shareholdings to remove Woolwich from office, and later decided to sell their shares in TT to a new company in which they would retain a majority holding. They did not offer to buy Woolwich’s shares as he stated he would only accept an offer in excess of 10 times the valuation obtained by the other members. Woolwich alleged that his exclusion from management and the failure of the respondents to make a reasonable offer for his shares amounted to unfairly prejudicial conduct.

HELD: Woolwich’s petition was dismissed. As regards Woolwich’s exclusion from management, Sir Donald Rattee stated that:

If it had not been for his own conduct, which led to his removal, I think that removal would probably have been unfair, but the fact is that he was not removed for no reason. He was removed because his fellow shareholders and directors concluded … that Mr. Woolwich’s continued involvement in the management of the company’s business, whether as director or employee, placed the efficient conduct of that business in serious jeopardy, in that he was treating staff in the production management department in a wholly inappropriate way ….

Unsurprisingly, given that Woolwich was seeking an outrageous sum for his shares, the failure of the respondents to offer to purchase Woolwich’s shares was not deemed to constitute unfairly prejudicial conduct.

Woolwich v Milne [2003] EWHC 414 (Ch)236236

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Given that exclusion from management cases in quasi-partnerships form most unfair prejudice petitions, the Law Commission recommended that, in certain circumstances, a shareholder’s exclusion from the management of a private company would be presumed to constitute unfairly prejudicial conduct.237 This recommendation was not acted upon.

15.3.7 Remedies

Where an unfair prejudice petition is successful, then s 996 provides the court with significant remedial flexibility, being able to make ‘such order as it thinks fit for giving relief in respect of the matters complained of’.238

From this, it is clear that ‘the greatest possible flexibility was intended by the legislature to be given to the courts’.239 Section 996(2) provides a non-exhaustive list of examples of orders that the court may make:

• an order regulating the conduct of the company’s affairs in the future (e.g. in Re HR Harmer Ltd,240 the Court of Appeal allowed an elderly director, who snooped on staff, ignored board decisions, and insulted customers, to remain as chair of the company, but deprived him of any executive role);

• an order requiring the company to refrain from doing an act complained of, or to perform an act that it has failed to perform (e.g. in McGuinness v Bremner plc,241 a company that failed to hold a requisitioned meeting of the members was ordered to do so);

• an order authorizing civil proceedings to be brought in the name and on behalf of the company by such persons and on such terms as the court may direct;

• an order requiring the company not to make any, or any specified, alterations in its articles without the leave of the court;

• an order providing for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly. This is by far the most common remedy sought and ordered under s 996.

Share purchase orders are discussed in more detail at 15.3.7.1.

(p. 414) The petitioner must specify the relief that he seeks242 and that relief must be ‘appropriate to the unfairly prejudicial conduct of which the petitioner complains’.243 Note, however, that if unfair prejudice is founded, the court is not bound to grant the petitioner the relief he sought.244 Indeed, the court must consider the full range of remedies available and ‘the relief need not be directed solely towards remedying the particular things that have happened’,245 although preventing future reoccurrences of the conduct complained of is clearly important. As

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Patten J stated, the court is ‘entitled to look at the realities and practicalities of the overall situation, past, present and future’.246 This breadth means that the court can take into account not just the effects that the conduct has had on the petitioning member, but the effects on third parties (such as creditors).247 As Burnton LJ stated, ‘I do not see why the court should close its eyes to the interests of others, and the effect of any order made under section 996 on them, although of course the weight to be given to their interests will depend on the circumstances.’248

Although a s 994 petition is a personal remedy, it is possible for a member to seek relief on behalf of the company, but only where the only purpose of the application is to obtain payment of a sum of money to the company, and there is some real financial benefit to be derived therefrom by the petitioning member.249 The courts are wary of petitioners effectively trying to use the unfair prejudice remedy to avoid the procedural limitations of a derivative claim.

The unfair prejudice petition is not an equitable remedy. Accordingly, there is no requirement for the petitioner to ‘come with clean hands’,250

but unmeritorious behaviour on the part of the petitioner might lead the court to conclude that the conduct complained of was not unfair, or that the remedy granted should be reduced.251

A s 994 petition is not subject to a limitation period, but because the granting of relief is discretionary, the court may refuse to grant a remedy where a substantial period has elapsed between the unfairly prejudicial conduct and the petition being brought.252 The lack of a limitation period is likely due to the fact that ‘[u]nfair prejudice proceedings generally raise numerous factual issues entailing examination of events over a considerable period of time’.253 The result of this is that ‘trials of s 994 petitions can be long and complex’.254 For example, in one case concerning shares worth around £24,600, the legal costs amounted to £320,000.255 The case of Re Freudiana Music Co Ltd256 took over (p. 415) 165 days of court time, with the successful respondent awarded costs of £2 million. The courts are aware of this, with Arden LJ stating that, ‘[c]ourts must, where possible, find ways and means of reducing the hearing times for these cases’.257

15.3.7.1 Share purchase orders

As noted, the most common remedy sought and awarded is a share purchase order, of which there are three types:

1. The court may order the respondent (usually the majority shareholder) to buy the shares of the petitioner (usually a minority shareholder). This is the most common remedy sought and ordered. 2. The court may order the respondent to sell his shares to the petitioner. This relief is rarely sought, but it has been granted in

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several cases258 (including in some cases where the majority shareholder was ordered to sell his shares to the petitioner).259

3. The court may order the company concerned to purchase the shares of the petitioner.

The rationale behind the popularity of a share purchase order was stated by Patten J:

In most cases, the usual order to make will be the one requiring the Respondents to buy out the petitioning shareholder at a price to be fixed by the court …. The reasons for making such an order are in most cases obvious. It will free the petitioner from the company and enable him to extract his share of the value of its business and assets in return for foregoing any future right to dividends. The company and its business will be preserved for the benefit of the Respondent shareholders, free from his claims and the possibility of future difficulties between shareholders will be removed. In cases of serious prejudice and conflict between shareholders, it is unlikely that any regime or safeguards which the court can impose, will be as effective to preserve the peace and to safeguard the rights of the minority.260

Unfortunately, the CA 2006 provides no guidance on what principles should be adhered to when determining the price of the shares. Two questions are of importance. The first is how the shares should be valued. The overriding principle is that ‘the price fixed by the court must be fair’261 and, accordingly, an array of factors can have an impact upon the valuation process. For example, the unfairly prejudicial conduct that has taken place is clearly of importance, especially if it adversely affected the share price. Often, this means that ‘the court is actually valuing shares, not as they are, but as they would have been if events had followed a different course’262 (i.e. had the unfairly prejudicial conduct not taken place).

Most s 994 petitioners are minority shareholders and so the ‘issue of central concern is whether the price should be discounted to reflect a minority shareholder’s lack of control, something which would undoubtedly occur in a voluntary sale of a minority (p. 416) interest in a company’.263 On this, Nourse J stated that ‘there is in my judgment no rule of universal application’,264 but the courts have developed general principles based on the company involved:

• Where the company is a quasi-partnership, the shares will usually be valued on a pro-rata basis, without applying any discount. As noted, many s 994 cases are brought by members of a quasi-partnership who have been excluded from management. Accordingly, the sale of the shares is essentially being forced on the petitioner due to the unfairly prejudicial conduct of the respondent, so it would be ‘most unfair that

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he should be bought out on the fictional basis applicable to a free election to sell his shares …’.265 However, this is a general principle only and a discount may be applied if the facts merit it; for example, where petitioner purchased the shares purely as an investment,266 or where the member left of his own volition.267

• Where the company is not a quasi-partnership, then the share price will usually be discounted to reflect the fact that it is a minority holding and the fact that the shares were likely bought as an investment only.268 Again, this is a general principle only and the courts may decide not to apply a discount based on the facts.269

The second question is what date the shares should be valued at. There appears to be no general rule regarding when the valuation should be made,270 but Nourse J stated that ‘[p]rima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased’271 and the Court of Appeal has stated that this is to be the starting point.272 However, the Court then went on to state that ‘there are many cases in which fairness (to one side or the other) requires the court to take another date’.273 For example, in Re OC Transport Services Ltd,274

the court held that the date of valuation should be before the conduct complained of took place, as the conduct had adversely affected the share price. Accordingly, the valuation date was set at two-and-a-half years before the date of the petition.

15.3.7.2 The availability of winding up

One question that has arisen is whether the court has the power under s 996 to wind up a company. Nothing in s 996 indicates that winding up is not available, but the Law Commission opined that winding up is not available275 based on the first-instance judgment of Ferris J in Re Full Cup International Trading Ltd.276 However, a measure of uncertainty exists as, in the more recent case of Apex Global Management Ltd v FI Call Ltd,277

Hildyard J stated that ‘the court should not ordinarily make a winding-up order pursuant to section 996, given the specific provisions for such a remedy …’.278 In practice, this uncertainty is not a major issue as very few petitioners would seek a winding-up order in an unfair prejudice petition (such petitioners would usually seek a winding up order under s 122 of the Insolvency Act 1986 (IA 1986)). However, judicial or (p. 417) statutory clarification is desirable. The Law Commission recommended that winding up should be added to the list of example remedies now found in s 996(2),279 but this recommendation was rejected by the CLRSG280 and did not make it into the CA 2006.

The relationship between s 994 and s 122 is discussed at 15.4.2.1.

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15.3.7.3 Relationship with other remedies

A member may have several remedies available to him, and this might impact upon a member’s ability to bring an unfair prejudice petition in several ways:

• The availability of an alternative remedy might result in an unfair prejudice petition being dismissed. For example, in Re Legal Costs Negotiators Ltd,281 an unfair prejudice petition was dismissed, inter alia, because the petitioner, as a majority shareholder, could pass a resolution that would have terminated the prejudicial state of affairs.

• Unfairly prejudicial conduct may also justify winding up the company. The relationship between the unfair prejudice remedy and the winding-up petition is discussed at 15.4.2.1.

• Certain conduct (e.g. a director breaching a general duty) may amount to unfairly prejudicial conduct and it may also allow a member to commence a derivative claim. The courts will not strike out an unfair prejudice petition merely because the conduct complained of could also form the basis of a derivative claim.282 Instead, if both claims are brought based largely on the same conduct, the court will, based on the complaint, examine both remedies and determine which is more appropriate. For example, if a successful unfair prejudice petition can obtain the relief sought, then permission to continue the derivative claim will likely be refused.283

15.4 The petition for winding up

Perhaps the most extreme remedy available to an aggrieved member is to petition the court for an order winding up the company. Despite the remedial flexibility afforded to the court in cases involving unfairly prejudicial conduct, winding up is likely not available under s 996 of the CA 2006 (although, as noted, this issue is not clear). A member desiring the winding up of the company will need to petition the court under s 122(1) of the IA 1986 for a compulsory winding-up order.

Compulsory winding up orders are discussed at 23.1.2.

Section 122(1) provides seven grounds for a compulsory winding-up order, of which two are relevant here. A company may be wound up where the company passes a special resolution resolving that the company should be wound up.284 This will, however, likely be of no use to an aggrieved minority shareholder, for whom the key provision is s 122(1) (g), which is discussed next.

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15.4.1 Just and equitable winding up

Section 122(1)(g) empowers the court to wind up a company if it is ‘of the opinion that it is just and equitable that the company should be wound up’. The words ‘just and equitable’ (p. 418) are clearly extremely broad, but the courts have not sought to establish any limits on their interpretation. As Neville J stated, ‘[t]he words “just and equitable” are words of the widest significance, and do not limit the jurisdiction of the court to any case. It is a question of fact, and each case must depend upon its own circumstances.’285 Accordingly, a wide range of activities have justified winding up, including:

• Where a company is fraudulently promoted, a winding-up order may be appropriate. For example, in Re London and County Coal Co,286 a company was set up and sold shares, but the promoters had no intention that the company would carry on any business. The court had no hesitation in winding up the ‘wretched concern’.287

• A company may be wound up if it was set up for an unlawful purpose,288 or for a fraudulent purpose.289

• A company may be wound up if it is deadlocked, but quite what amounts to a ‘deadlock’ is not entirely clear. An inability to make company decisions will certainly amount to a deadlock. Thus, in Re Yenidje Tobacco Co Ltd,290 a company was wound up when its two directors (who each held 50 per cent of the company’s shares) refused to talk to one another.

• Where a company’s objects clause indicates that it has been formed for a particular purpose (known as the company’s ‘substratum’), a winding-up order will be made if that purpose can no longer fulfilled.291 Cases involving a loss of substratum are likely to disappear over time, because companies created under the CA 2006 have unrestricted objects by default.292

• A winding-up order may be made if the petitioner can demonstrate that there is a ‘justifiable lack of confidence in the management of the company’s affairs’.293 Such instances tend to be classified as cases involving a ‘lack of probity’, and clearly this is a broad and vague ground for winding up. Examples of conduct that have merited winding up here include (i) a failure to submit accounts or hold general meetings when required;294 (ii) stealing money from the company;295 (iii) a director selling corporate assets to a rival company he controls;296 (iv) where a controller of the company regards the company as his property;297 and (v) where the controller acted in an oppressive manner.298 Note, however, that mere inefficiency, carelessness, or negligence will not be enough to justify a winding up.299

Whilst the courts may not seek to limit the type of case subject to s 122(1) (g), the law does impose limitations in terms of who may petition the court for a winding-up order.

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(p. 419) 15.4.1.1 Standing to petition the court

Both statute and the courts have established rules regarding who has standing to seek a winding-up petition. The starting point in s 124(1) of the IA 1986, which sets out who can apply to the court for a compulsory winding-up order. For our purposes, it should be noted that members or shareholders are not expressly listed. Instead, s 124(1) provides that a winding-up application can be made by a ‘contributory or contributories’, with a contributory being a ‘person liable to contribute to the assets of a company in the event of its being wound up …’.300 This would obviously include a shareholder whose shares were partly paid up but it would arguably not include a shareholder whose shares were fully paid. Given that, in most companies, shares are fully paid up, this would be a significant limitation upon the scope of s 122, so it is not surprising that the courts will permit fully paid-up members to petition the court under s 122. However, such a member will need to demonstrate that he has a ‘tangible interest’301 that entitles him to ask for a winding up. This will generally require the member to show that there is a ‘prima facie probability that there will be assets available for distribution amongst the shareholders’.302 From this, it would appear that a fully paid-up member of an insolvent company would not have standing to petition the court under s 122 as he has no tangible interest in the company. However, Oliver J has stated that surplus assets are not the only type of tangible interest and that a fully paid-up member will have standing to apply for winding up if he can show that the winding up would ‘achieve some advantage, or avoid or minimise some disadvantage, which would accrue to him by virtue of his membership of the company’.303 Oliver J gives the example of a member who wishes to wind up a company because he is engaged in litigation with that company, although he goes on to acknowledge that this is not the type of interest that Jessel MR had in mind when he devised the ‘tangible interest’ test.

Section 124(1) is discussed in more detail at 23.1.2.1.

As s 122(1)(g) is an equitable remedy, it follows that the petitioner’s own conduct may be relevant in determining whether a winding-up petition can proceed. The maxim ‘he who comes to Equity must do so with clean hands’ applies to the winding-up remedy,304 and so a petition will not be successful if, for example, it is the petitioner’s own misconduct that causes a breakdown in confidence between him and other parties,305 or if the petitioner is not seeking the relief sought but is instead using a winding-up petition to put pressure on the company.306

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15.4.1.2 Quasi-partnerships

Section 122(1)(g), along with other member remedies (especially the unfair prejudice remedy), acquires an increased importance where the company in question is a ‘quasi-partnership’. What constitutes a quasi- partnership and the importance of s 122(1)(g) to such companies was the subject of the following landmark case. (p. 420) (p. 421)

FACTS: In 1945, Ebrahimi and Nazar formed a partnership that sold rugs and carpets, and it was understood that both parties would be involved in managing the firm. In 1958, they incorporated the business (Westbourne Galleries Ltd), and Ebrahimi and Nazar became the company’s first directors, with each holding 500 shares. Shortly thereafter, George (Nazar’s son) also became a director and Ebrahimi and Nazar each transferred 100 shares to him. In 1969, a dispute arose, and Nazar and George used their majority shareholding to vote Ebrahimi out of office. As Westbourne distributed its profits as directors’ fees and not as dividends, Ebrahimi’s removal from office meant that he was entitled to no share in the profits (unless a dividend was declared, which the company had never done). Ebrahimi petitioned the court for a winding-up order.

HELD: The House held that Nazar and George had, in removing Ebrahimi as a director, acted in accordance with the Companies Act 1948 and Westbourne’s articles. However, Lord Wilberforce stated that the words ‘just and equitable’ are:

a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not … entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL)

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unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.307

The question that arose is when such ‘equitable considerations’ would arise. On this, Lord Wilberforce stated:

It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly, the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence—this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be ‘sleeping’ members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company—so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.308

Lord Wilberforce noted that companies that exhibited these characteristics were referred to as ‘quasi-partnerships’ and that Westbourne was clearly such a company. Accordingly, equitable considerations would be relevant here. The relevant consideration here was the fact that when Nazar and Ebrahimi set up the partnership, it was understood that both parties would be involved in managing the firm and, when the business was incorporated, there was an indisputable inference that ‘the character of the association would, as a matter of personal relation and good faith, remain the same’.309 By removing Ebrahimi from office, the Nazars had inequitably breached this understanding, and so the winding up of Westbourne was ordered.

See Dan D Prentice, ‘Winding Up on the Just and Equitable Ground: The Partnership Analogy’ (1973) 89 LQR 107.

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Ebrahimi basically establishes that where a company is a quasi- partnership, the conduct of the controllers should not be judged purely based on the rights of the parties (as usually provided for in statute or the articles), but also by the legitimate expectations of the parties and any informal agreements that exist between them. The courts have confirmed on multiple occasions that, in quasi-partnerships, there will often be an expectation that the members will participate in management and that exclusion of a member from management will likely justify the winding up of the company even if the right of exclusion is lawfully exercised310 (as it was in Ebrahimi).

15.4.2 The relationship between winding up and the other remedies

Prior to the Companies Act 1948, the courts would not make a winding-up order if the petitioner had an alternative remedy available. The rationale behind this was to prevent the dissolution of companies that were still commercially viable. Today, the law acknowledges that, even where multiple remedies are available, winding up may still be appropriate. Section 125(2) of the IA 1986 provides that, where a petition is made by a contributory, the court must refuse to grant a winding-up order if some other remedy is available and the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. Note that this other remedy need not be one of the statutory remedies discussed in this chapter. For example, if an offer is made to purchase the petitioner’s shares, his winding-up petition may be rejected if the court thinks that he acted unreasonably in refusing the offer.311 It is important, however, to understand the relationship between the winding- up petition and the other statutory remedies discussed in this chapter, with the principal overlap being between a winding-up petition and an unfair prejudice petition.

15.4.2.1 Winding up and the unfair prejudice remedy

Given that the unfair prejudice remedy was introduced to allow for a remedy other than winding up, it is unsurprising that the number of s 122(1)(g) petitions has decreased since the unfair prejudice remedy was introduced. Historically, it was common for a petitioner to seek a remedy under the unfair prejudice provisions and apply for a winding-up order. The inclusion of the winding-up petition placed significant pressure on the defendant because a compulsory winding up generally commences when the winding-up petition is presented to the court.312 From that point onward, the company is (p. 422) effectively paralysed as any disposition of the company’s property, any transfer of shares, or any alteration of the status of the company’s members is void, unless the court otherwise orders.313

Whilst it is the case that an unfairly prejudicial act may also justify winding up the company, the two remedies do have differing scopes. For example, in most cases involving a deadlock,314 the petitioners are not

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treated unfairly, and so whilst a winding-up order might be appropriate, a remedy under s 994 would not be granted. It is also true that the two remedies ‘ask the court to consider different questions: on a winding-up petition, the question is whether the company’s existence should be ended; on an unfair prejudice petition, the question is how the company’s existence should be continued’.315

Given these differences, and the courts’ concern that the addition of a winding-up petition was being used to place undue pressure on the defendant, a Practice Direction was issued which states that a winding-up petition should only accompany an unfair prejudice petition if winding up ‘is the relief which the petitioner prefers or if it is considered that it may be the only relief to which he is entitled’.316

Chapter summary

• A member who is wronged may be able to commence a personal action against the person(s) who wronged him.

• Collective forms of action exist in the form of representative actions and GLOs.

• Where both a member and the company have a cause of action arising out of the same set of facts, both actions will be permitted to go ahead, unless the member’s loss is reflective of that of the company.

• Where a company has sustained a loss, a member may be able to bring a derivative claim on behalf of the company (CA 2006, Pt 11).

• In order to continue a derivative claim, the member must obtain permission from the court to continue the claim.

• A member can petition the court for a remedy where the company’s affairs have been conducted in a manner that is unfairly prejudicial to that member’s interests as a member (CA 2006, Pt 30).

• In unfair prejudice cases, the most common remedy is a share purchase order (usually where the company is ordered to purchase the claimant’s shares).

• A member can petition the court for a winding-up order, with the relevant ground here being winding up where the court thinks it is just an equitable to do so (IA 1986, s 122(1)(g)).

Further reading MR Chesterman, ‘The “Just and Equitable” Winding Up of Small Private Companies’ (1973) 36 MLR 129.

• Discusses the winding-up remedy found in the IA 1986, s 122(1)(g), focusing on its use in relation to quasi-partnerships.

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Paul L Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (10th edn, Sweet & Maxwell 2016) ch 20.

• A detailed, yet lucid, account of the unfair prejudice remedy and the ability to petition the court for a winding-up order on just and equitable grounds.

Law Commission, Shareholder Remedies: Consultation Paper (Law Com CP No 142, 1996).

• A consultation paper that discusses the rule in Foss v Harbottle, the unfair prejudicial remedy, and the winding-up petition.

Charles Mitchell, ‘Shareholders’ Claims for Reflective Loss’ (2004) 120 LQR 457.

• Provides a readable and analytical account of the no reflective loss principle.

Jill Poole and Pauline Roberts, ‘Shareholder Remedies: Efficient Litigation and the Unfair Prejudice Remedy’ [1999] JBL 38.

• Discusses the Law Commission’s proposed reforms of the unfair prejudice remedy, focusing on those measures designed to make s 994 cases less lengthy and costly.

Paul von Nessen, SH Goo, and Chee Keong Low, ‘The Statutory Derivative Action: Now Showing Near You’ (2008) 7 JBL 627.

• Discusses the worldwide proliferation of the statutory derivative claim and examines how such derivative claims operate in the UK, Commonwealth countries, the US, and Hong Kong.

KW Wedderburn, ‘Shareholders’ Rights and the Rule in Foss v Harbottle’ [1957] CLJ 194.

• Despite its age, this remains a seminal article on the ability of a member to enforce the constitution and how this ability relates to the rule in Foss v Harbottle.

Self-test questions 1. Define the following terms:

• no reflective loss principle;

• representative action;

• group litigation order;

• derivative claim;

• proper claimant principle;

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• irregularity principle;

• quasi-partnership.

2. State whether each of the following statements is true or false and, if false, explain why:

• Where an unlawful act causes loss to both the company and a member, the general rule is that both may commence actions against the perpetrator of the act.

• Where the company has been wronged, the members can usually bring a claim on behalf of the company.

• The common law derivative action has been abolished.

• A derivative claim can be brought in relation to a cause of action that occurred before the derivative claimant became a member.

• The court will refuse permission to continue a derivative claim where the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company. (p. 424)

• Section 994 allows a person to bring a claim where the company’s affairs have been conducted in a manner that is unfair or prejudicial to his interest as a member.

• Criminal conduct can amount to unfairly prejudicial conduct.

• The most common remedy awarded under s 996 is a share purchase order.

• A member cannot bring both a s 994 petition and a winding-up petition.

3. ‘The statutory derivative claim provides a much more useful remedy than the common law derivative action.’ Discuss the validity of this quote. 4. Stanley, Sophie, and Kim are the directors of Dragon Goods Ltd (‘DG’), a company that manufactures tools that are then sold by Dragon Tools Ltd (another company in the Dragon Group). The company has issued 1,000 shares as follows:

• 500 shares are held by Dragon plc (DG’s parent company);

• each of the three directors holds 100 shares;

• 200 shares are held by Dominic, a local businessman whose firm is one of DG’s principal suppliers.

DG has adopted the model articles, but has added a provision stating that each director is to receive a salary of £150,000 per year. The articles also provide that ‘the business of Dragon Goods Ltd is the manufacture of tools’. For the past few years, DG has not paid a dividend as the profits made by the company are used to pay the directors’ salaries. This has angered Dominic, but DG’s directors assure him that, if profits increase, a dividend will be paid.

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For a few months, Sophie and Kim have been trying to persuade Stanley that DG should diversify its business into providing electrical components for consumer products. Stanley disagrees, stating that ‘the company should stick to what is it good at’. At a board meeting, an argument ensued in relation to DG’s future direction, which led to Stanley falling out with Sophie and Kim. Since then, Sophie and Kim have outvoted Stanley at all directors’ meetings and have sought to make all the business decisions themselves. As a result, DG began manufacturing electrical components. Since this meeting, Stanley has stopped attending board meetings. At the most recent board meeting, in Stanley’s absence, Sophie and Kim voted to remove Stanley as a director and he was subsequently informed of this. This meeting also noted that, as a result of DG diversifying into electrical components, DG’s profits had improved in recent months and so Sophie and Kim proposed that their salaries should be increased to £200,000. The directors of Dragon plc agreed and so the articles of DG were amended to provide that Sophie and Kim would receive an annual salary of £200,000. Dominic and Stanley are angry at the way events have unfolded, and seek your advice as to whether Sophie, Kim, or DG have engaged in any breaches of the law and, if so, what remedies (if any) are available.

This book is accompanied by online resources to better support you in your studies. Visit www.oup.com/uk/roach-company/ for:

• answers to the self-test questions;

• further reading lists;

• multiple-choice questions;

• glossary.

Updates to the law can be found on the author’s Twitter account (@UKCompanyLaw) and further resources can be found on the author’s blog (www.companylawandgovernance.com).

Notes: 1 These remedies are traditionally known as ‘shareholder remedies’ (indeed, virtually all current texts use this term). However, given that they are available to members and not just shareholders (indeed, the relevant legislative provisions use the word ‘member’), they will be referred to here as members’ or member remedies.

Online resources

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2 Companies Act 2006 (CA 2006), s 33.

3 ibid s 125(1) (discussed at 13.2.3).

4 ibid s 170(1).

5 Day v Cook [2001] EWCA Civ 592, [2003] BCC 256 [38] (Arden LJ). Note that Arden LJ stated that the company’s claim will ‘always’ trump that of the shareholder, but as discussed below, this is no longer the case and an exception to the ‘no reflective loss’ principle has been created in the case of Giles v Rhind.

6 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1981] Ch 257 (Ch).

7 [1982] Ch 204 (CA) 222.

8 ibid 222–3.

9 LS Sealy, ‘A Setback for Minority Shareholders’ (1982) 41 CLJ 247, 247.

10 ibid.

11 Johnson v Gore Wood & Co (No 1) [2002] AC 1 (HL) 62.

12 ibid 36.

13 ibid 35. Lord Millett (at 66) stated that reflective loss does not just include the diminution of the value of shares, but also includes ‘the loss of dividends … and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds’.

14 ibid. For an example of such a situation, see George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] BCC 310 (CA).

15 [2002] AC 1 (HL) 35–6.

16 Day v Cook [2001] EWCA Civ 592, [2003] BCC 256 [79] (Arden LJ).

17 Johnson v Gore Wood & Co (No 1) [2002] AC 1 (HL) 35 (Lord Bingham).

18 Charles Mitchell, ‘Shareholders’ Claims for Reflective Loss’ (2004) 120 LQR 457, 464.

19 Gardner v Parker [2004] EWCA Civ 781, [2005] BCC 46.

20 Paul L Davies and Sarah Worthington, Gower & Davies Principles of Modern Company Law (10th edn, Sweet & Maxwell 2016) 611.

21 See also Perry v Day [2004] EWHC 3372 (Ch), [2005] 2 BCLC 405.

22 Giles v Rhind [2001] 2 BCLC 582 (Ch).

23 [2002] EWCA Civ 1428, [2003] Ch 618 [35].

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24 ibid [34].

25 In relation to competition law, an opt-out form of action does exist, namely the Collective Proceedings Order, but that is outside the scope of this text.

26 Civil Procedure Rules 1998 (CPR 1998), r 19.6(1).

27 ibid r 19.6(4)(a).

28 At the time of writing, 105 GLOs have been made since 2000—see www.gov.uk/guidance/group-litigation-orders accessed 10 January 2019.

29 CPR 1998, r 19.10.

30 ibid r 19.12(1)(a).

31 Various Claimants v Wm Morrison Supermarkets plc [2017] EWHC 3113, [2018] 3 WLR 691.

32 Wm Morrison Supermarkets plc v Various Claimants [2018] EWCA Civ 2339.

33 CA 2006, s 170(1).

34 Article 3 of the model articles provides that the directors may ‘exercise all the powers of the company’, which would include the right to litigate on behalf of the company. Where a company is in liquidation or administration, then the liquidator or administrator (as applicable) also has the right to commence or defend proceedings on the company’s behalf.

35 John Shaw & Sons (Salford) Ltd [1935] 2 KB 113 (CA).

36 Marshall’s Valve Gear Co Ltd v Manning, Wardle & Co Ltd [1909] 1 Ch 267 (Ch); Alexander Ward & Co Ltd v Samyang Navigation Co Ltd [1975] 1 WLR 673 (HL). Again, this would be of no aid as Marcus is the majority shareholder.

37 (1843) 2 Hare 461, 490 (Wigram VC).

38 ibid.

39 ibid.

40 See e.g. Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (CA) 210; Law Commission, Shareholder Remedies (Law Com CP No 142, 1996) para 1.06.

41 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (CA) 210.

42 Macdougall v Gardiner (1875) 1 ChD 13 (CA) 25.

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43 Law Commission, Shareholder Remedies (Law Com CP No 142, 1996) para 4.3.

44 Macdougall v Gardiner (1875) 1 ChD 13 (CA) 25.

45 KW Wedderburn, ‘Shareholders’ Rights and the Rule in Foss v Harbottle’ [1957] CLJ 194, 198.

46 Wallersteiner v Moir (No 2) [1975] 2 WLR 389 (CA) 390 (Lord Denning MR).

47 See the judgment of Jenkins LJ in Edwards v Halliwell [1950] 2 All ER 1064 (CA).

48 See e.g. Taylor v National Union of Mineworkers (Derbyshire Area) [1985] BCLC 237 (unlawful strike action).

49 See e.g. Simpson v Westminster Palace Hotel Co (1860) 8 HL Cas 712 (HL).

50 Baillie v Oriental Telephone and Electric Co Ltd [1915] 1 Ch 503 (CA).

51 Wood v Odessa Waterworks Co (1889) 42 ChD 636 (Ch).

52 Pender v Lushington (1877) 6 Ch D 70 (Ch).

53 Edwards v Halliwell [1950] 2 All ER 1064 (CA).

54 Pavlides v Jensen [1956] Ch 565 (Ch).

55 Daniels v Daniels [1978] Ch 406 (Ch).

56 Nurcombe v Nurcombe [1985] 1 WLR 370 (CA).

57 Smith v Croft (No 2) [1988] Ch 114 (Ch).

58 Law Commission, Shareholder Remedies (Law Com No 246, 1997) para 6.4. See also Geoffrey Morse, Palmer’s Company Law (Sweet & Maxwell 2016) para 8.3704.1, who describes the common law rules as ‘complex, unclear and highly restrictive’.

59 CA 2006, s 263(2)(b) and (c).

60 ibid s 263(3)(c) and (d).

61 See e.g. Wallersteiner v Moir (No 2) [1975] 1 QB 373 (CA); Airey v Cordell [2006] EWHC 2728 (Ch), [2007] Bus LR 391.

62 [2013] EWHC 348 (Ch), [2013] Ch 551 [44]. See also Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503, where the approach of Briggs J was followed.

63 ibid [34].

64 Tan Cheng-Han, ‘Multiple Derivative Actions’ (2013) 129 LQR 337, 339.

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65 CA 2006, s 260(1).

66 Novatrust Ltd v Kea Investments Ltd [2014] EWHC 4061 (Ch).

67 CA 2006, s 260(5)(c).

68 CPR 1998, r 19.9(3).

69 CA 2006, s 260(4).

70 See e.g. Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 WLR (QB).

71 CA 2006, s 260(3).

72 ibid s 260(5)(a) and (b).

73 ibid s 260(3).

74 CA 2006, Explanatory Notes, para 494.

75 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420 [75] (Lewison J).

76 CA 2006, s 260(2).

77 Law Commission, Shareholder Remedies (Law Com No 246, 1997) para 6.41.

78 CPR 1998, r 19.9(2).

79 ibid r 19.9A(2).

80 ibid r 19.9A(4) and (7).

81 CA 2006, s 261(2).

82 CPR 1998, r 19.9A(3).

83 CA 2006, s 261(2).

84 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420 [78].

85 CA 2006, s 261(3).

86 Which is why it is known as the ‘mandatory test’.

87 CA 2006, s 263(2)(a).

88 Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2008] BCC 885 [36] (William Trower QC).

89 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420 [85] (Lewison J).

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90 ibid.

91 ibid [86]. For an example of a case that did fall foul of s 263(2)(a), see Bridge v Daley [2015] EWHC 2121 (Ch).

92 CA 2006, s 263(2)(b).

93 ibid s 180(4).

94 ibid s 175(4)(b) and (5)(b).

95 ibid s 263(2)(c).

96 North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 (PC).

97 CA 2006, s 239(3) and (4).

98 ibid s 239(4).

99 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420 [79].

100 Stainer v Lee [2010] EWHC 1539 (Ch), [2011] BCC 134 [29] (Roth J).

101 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420 [79].

102 Fanmailuk.com Ltd v Cooper [2008] EWHC 2198 (Ch), [2009] BCC 877 [2] (Robert Englehart QC).

103 Brenda Hannigan, Company Law (5th edn, OUP 2018) 562.

104 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420 [79] (Lewison J).

105 This means that the factors that are relevant to the case must be taken into account, and the court has a discretion to take other factors into account if it so wishes (Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2008] BCC 885 [31] (William Trower QC)).

106 CA 2006, s 263(3)(a).

107 Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch), [2008] BCC 866 [42] (Floyd J).

108 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420.

109 Goldsmith v Sperrings [1977] 1 WLR 478 (CA) 503 (Bridge LJ). Note that this is a not a derivative claim case, but it was cited with approval in Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420 [119].

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110 Barrett v Duckett [1995] BCC 362 (CA).

111 Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503.

112 Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch), [2008] BCC 866; Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2010] BCC 420.

113 CA 2006, s 263(3)(b).

114 ibid s 263(2)(a).

115 Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch), [2008] BCC 866 [43].

116 CA 2006, s 263(3)(c).

117 ibid s 263(3)(d).

118 ibid s 263(2)(b) and (c).

119 ibid s 263(3)(e).

120 Cullen Investments Ltd v Brown [2015] EWHC 473 (Ch), [2015] BCC 539 [57] (Mark Anderson QC).

121 Paphitis is one of the ‘Dragons’ on Dragon’s Den and his increased profile meant that any damage to his reputation would likely impact on that of Ryman’s.

122 [2011] EWHC 2287 (Ch), [2012] BCC 676 [75].

123 ibid [85].

124 CA 2006, s 263(3)(e).

125 Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2008] BCC 885 [50] (William Trower QC).

126 ibid [49].

127 ibid [51].

128 ibid [53].

129 See e.g. Kleanthous v Paphitis [2011] EWHC 2287 (Ch), [2012] BCC 676, where the derivative claimant was seeking a share purchase order, which is the usual remedy in unfair prejudice cases.

130 CA 2006, s 263(4).

131 Smith v Croft (No 2) [1988] Ch 114 (Ch) 185.

132 CA 2006, s 263(2)(c).

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133 HL Deb 9 May 2006, vol 681, col 884.

134 CPR 1998, r 44.2(2)(a).

135 Wallersteiner v Moir (No 2) [1975] 2 WLR 389 (CA) 404 (Buckley LJ).

136 CPR 1998, r 19.9E.

137 CA 2006, s 205(1) and (2).

138 Geoffrey Morse, Palmer’s Company Law (Sweet & Maxwell 2018) para 8.3801.

139 CA 1948, s 210(2)(b) (now repealed).

140 Board of Trade, Report of the Company Law Committee (Cmnd 1749, 1962) para 212.

141 CA 2006, s 994(1). Former members do not have standing (Re a Company [1986] 2 All ER 253 (Ch)).

142 Atlasview Ltd v Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191.

143 Re Legal Negotiators Ltd [1999] BCC 547 (CA).

144 Re Baltic Real Estate Ltd [1992] BCC 629 (Ch).

145 CA 2006, s 994(2).

146 ibid s 995.

147 Re Scitec Group Ltd [2012] EWHC 661 (Ch).

148 Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009, SI 2009/1804, reg 48.

149 [2014] EWCA Civ 191, [2014] BCC 376.

150 ibid [37].

151 A claim can also, in appropriate cases, be made against former members (Re Little Olympian Each Ways Ltd (No 3) [1995] 1 BCLC 636 (Ch)). This prevents members from avoiding a petition by selling their shares.

152 Re Fahey Developments Ltd [1996] BCC 320 (Ch) 325 (Charles Aldous QC).

153 Graham v Every [2014] EWCA Civ 191, [2014] BCC 376 [37].

154 See also Re Unisoft Group Ltd (No 3) [1994] BCC 766 (Ch); Re Leeds United Holdings plc [1997] BCC 131 (Ch).

155 [1999] BCC 547 (CA) 549.

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156 ibid 552.

157 ibid.

158 An important point was that, if Graham had been able to acquire these shares, his shareholding would have increased to 27 per cent, which would have allowed him to defeat a special resolution.

159 [2014] EWCA Civ 191, [2014] BCC 376 [30].

160 ibid [40].

161 [2012] EWHC 917 (Ch) [72].

162 ibid.

163 The opposite is also true, so a member of a subsidiary may be able to bring a claim based on the activities of the parent (Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 (HL)).

164 [2004] EWCA Civ 815, [2005] 1 WLR 3505 [26].

165 ibid.

166 Robert Goddard and Hans C Hirt, ‘Section 459 and Corporate Groups’ [2005] JBL 247, 252.

167 Lloyd v Casey [2002] 1 BCLC 454 (Ch).

168 Re Batesons Hotels (1958) [2013] EWHC 2530 (Ch), [2014] 1 BCLC 507.

169 David Milman, ‘Anticipated Unfair Prejudice’ (1987) 8 Co Law 272, 272.

170 Re Astec (BSR) plc [1999] BCC 59 (Ch) 81 (Jonathan Parker J).

171 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 (HL) 367 (Lord Denning).

172 CA 2006, s 994(1A).

173 Re Guidezone Ltd [2000] 2 BCLC 321 (Ch).

174 Re Bovey Hotel Ventures Ltd (Ch, 31 July 1981 (Slade J), quoted with approval in Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273 (Ch) 290–91 (Nourse J). It should be noted that in Re Saul D Harrison and Sons plc [1995] 1 BCLC 14 (CA), Hoffmann LJ expressed some doubts as to whether a ‘reasonable bystander’ test was appropriate.

175 Re Saul D Harrison and Sons plc [1995] 1 BCLC 14 (CA) 30 (Neill LJ).

176 [1999] 1 WLR 1092 (HL).

177 ibid 1098.

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178 Re Saul D Harrison and Sons plc [1995] 1 BCLC 14 (CA) 31 (Neill LJ).

179 [2003] EWHC 936 (Ch), [2003] BCLC 493 [101] (Peter Smith J).

180 [2004] EWCA Civ 118, [2004] BCC 466 [76] (Jonathan Parker LJ).

181 ibid [79].

182 [2006] EWHC 364 (Ch), [2007] 1 BCLC 520 [89].

183 ibid [91].

184 Re Unisoft Group Ltd (No 3) [1994] BCC 766 (Ch) 767 (Harman J).

185 Re Coroin Ltd [2013] EWCA Civ 781, [2014] BCC 14 [16] (Arden LJ).

186 Gerrard v Koby [2004] EWCA Civ 1763 (Ch), [2005] BCC 181.

187 Re Coroin Ltd [2012] EWHC 2343 (Ch) [631] (David Richards J).

188 O’Neill v Phillips [1999] 1 WLR 1092 (HL) 1098.

189 [1991] BCLC 959 (Ch).

190 ibid 993.

191 ibid.

192 [1994] 2 BCLC 354 (Ch) 404.

193 ibid 406.

194 ibid.

195 David Kershaw, Company Law in Context: Text and Materials (2nd edn, OUP 2012) 695.

196 Re Little Olympian Each Ways Ltd (No 3) [1995] 1 BCLC 636 (Ch).

197 Re London School of Electronics Ltd [1986] Ch 211 (Ch).

198 Re a Company (No 008699 of 1985) [1986] BCLC 382 (Ch).

199 Re a Company (No 002612 of 1984) [1986] 2 BCC 99,453 (CA).

200 Irvine v Irvine (No 1) [2006] EWHC 406 (Ch), [2007] 1 BCLC 349.

201 Re a Company (No 004415 of 1996) [1997] 1 BCLC 479 (Ch).

202 Grace v Biagioli [2005] EWCA Civ 1222, [2006] BCC 85.

203 Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622.

204 Re Sam Weller & Sons Ltd [1990] Ch 682 (Ch) (same dividend paid for 37 years, despite profits being available to pay higher dividends).

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205 See e.g. Re Carrington Viyella plc (1983) 1 BCC 98951 (Ch) (failure to obtain member approval for director’s service contract over two years did not amount to unfair prejudice).

206 [1990] BCLC 384 (Ch) 388.

207 ibid 393.

208 Re Saul D Harrison & Sons plc [1994] BCC 475 (CA) 489 (Hoffmann LJ).

209 Re Sunrise Radio Ltd [2009] EWHC 2983 (Ch), [2010] 1 BCLC 367 [7].

210 ibid [8].

211 Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198 (PC) 209 (Lord Steyn).

212 ibid.

213 Re a Company (No 00477 of 1986) [1986] BCLC 376 (Ch).

214 In the year in which the petition was brought, SW’s profits were £36,330 and the dividend paid amounted to £2,520 (representing one- fourteenth of the company’s profits).

215 [1990] Ch 682 (Ch) 690 (Peter Gibson J).

216 ibid 693.

217 ibid.

218 ibid.

219 O’Neill v Phillips [1999] 1 WLR 1092 (HL) 1105.

220 Re a Company (No 00477 of 1986) [1986] 2 BCC 99171 (Ch).

221 See also R&H Electrical Ltd v Haden Bill Electrical Ltd [1995] BCC 959 (Ch).

222 [2007] UKPC 26, [2007] BCC 272 [37].

223 ibid [36].

224 Re John Reid & Sons (Strucsteel) Ltd [2003] EWHC 2329 (Ch), [2003] 2 BCLC 319.

225 Re JE Cade & Son Ltd [1992] BCLC 213 (Ch).

226 Re Saul D Harrison and Sons plc [1995] 1 BCLC 14 (CA) 19–20.

227 ibid 19.

228 O’Neill v Phillips [1990] 1 WLR 1092 (HL) 1099, 1102.

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229 No unfair prejudice case has yet to reach the Supreme Court.

230 [1990] 1 WLR 1092 (HL) 1098–9.

231 Re Astec (BSR) plc [1999] BCC 59 (Ch) 87.

232 ibid 86.

233 Re Blue Arrow plc [1987] BCLC 585 (Ch).

234 [1993] BCLC 1126 (Ch) 1134.

235 Re Postgate and Denby (Agencies) Ltd [1987] BCLC 8 (Ch) 14.

236 See also Grace v Biagioli [2005] EWCA Civ 1222, [2006] BCC 85 (excluded director put himself in a position of conflict); Hawkes v Cuddy [2007] EWCA Civ 1072, [2008] BCC 125 (excluded director was precluded by law from participating in management).

237 Law Commission, Shareholder Remedies (Law Com No 246, 1997) paras 3.26–3.62.

238 CA 2006, s 996(1).

239 Supreme Travels Ltd v Little Olympian Each-Ways Ltd [1994] BCC 947 (Ch) 950 (Lindsay J).

240 [1959] 1 WLR 62 (CA).

241 (1988) 4 BCC 161 (Court of Session).

242 Companies (Unfair Prejudice Applications) Proceedings Rules 2009, SI 2009/2469, art 3(2). The relief sought need not be specified if the petitioner is willing to accept what order the court thinks fit.

243 Re JE Cade & Son Ltd [1991] BCC 360 (Ch) 368 (Warner J).

244 Re Full Cup International Trading Ltd [1995] BCC 682 (Ch); Hawkes v Cuddy [2009] EWCA Civ 291, [2010] BCC 597.

245 Re a Company (No 008126 of 1989) [1992] BCC 542 (Ch) 554 (Richard Sykes QC).

246 Grace v Biagioli [2005] EWCA Civ 1222, [2006] BCC 85 [73].

247 In Hawkes v Cuddy [2009] EWCA Civ 291, [2010] BCC 597 [84], Burnton LJ stated that the interests of creditors may, depending on the facts, ‘be decisive in deciding what order should be made’.

248 Hawkes v Cuddy [2009] EWCA Civ 291, [2010] BCC 597 [84].

249 Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164 [36]. This case is discussed at 15.3.6.1.

250 Re London School of Electronics Ltd [1986] Ch 211 (Ch).

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251 ibid.

252 Re Grandactual Ltd [2005] EWHC 1415 (Ch), [2006] BCC 73 (nine- year delay between conduct and petition).

253 Re Tobian Properties Ltd [2012] EWCA Civ 998, [2013] Bus LR 753 [27] (Arden LJ).

254 ibid.

255 Re Elgindata Ltd [1991] 1 BCLC 959 (Ch).

256 The Times (London, 4 December 1995) (CA).

257 Re Coroin Ltd [2013] EWCA Civ 781, [2014] BCC 14 [14].

258 Re Hedgehog Golf Co Ltd [2010] EWHC 390 (Ch); Oak Investment Partners XII Ltd Parnership v Boughtwood [2010] EWCA Civ 23, [2010] 2 BCLC 459; Goodchild v Taylor [2018] EWHC 2946 (Ch).

259 Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184 (Ch).

260 Grace v Biagioli [2005] EWCA Civ 1222, [2006] BCC 85 [75].

261 Re Bird Precision Bellows Ltd [1984] Ch 149 (Ch) 429 (Nourse J).

262 Profinance Trust SA v Gladstone [2001] EWCA Civ 1031, [2002] 1 WLR 1024 [31] (Robert Walker LJ).

263 DD Prentice, ‘Minority Shareholder Oppression: Valuation of Shares’ (1986) 102 LQR 179, 181.

264 Re Bird Precision Bellows Ltd [1984] Ch 149 (Ch) 431.

265 ibid 430.

266 ibid 431.

267 Re Phoenix Office Supplies Ltd [2002] EWCA Civ 1740, [2003] BCC 11.

268 Re Elgindata Ltd (No 1) [1991] BCLC 959.

269 See e.g. Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367.

270 Re London School of Electronics Ltd [1986] Ch 211 (Ch) 224 (Nourse J).

271 ibid.

272 Profinance Trust SA v Gladstone [2001] EWCA Civ 1031, [2002] 1 WLR 1024 [60] (Robert Walker LJ).

273 ibid [61].

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274 (1984) 1 BCC 99068 (Ch).

275 Law Commission, Shareholder Remedies (Law Com CP No 142, 1996) para 8.18.

276 [1995] BCC 682 (Ch) 694.

277 [2015] EWHC 3269 (Ch).

278 ibid [51].

279 Law Commission, Shareholder Remedies (Law Com No 246, 1997) para 4.35.

280 CLRSG, ‘Modern Company Law for a Competitive Economy: Developing the Framework’ (2000) para 4.105.

281 [1999] BCC 547 (CA) (discussed at 15.3.3). See also Re Baltic Real Estate Ltd (No 2) [1992] BCC 629 (Ch).

282 Re Fahey Development Ltd [1996] BCC 320 (Ch).

283 See e.g. Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch), [2008] BCC 866 (discussed at 15.2.3.3).

284 IA 1986, s 122(1)(a).

285 Re Blériot Manufacturing Aircraft Co Ltd (1916) 32 TLR 253, 255.

286 (1866–67) LR 3 Eq 355.

287 ibid 361 (Sir W Page-Wood VC).

288 Re International Securities Corp (1908) 99 LT 581 (unlawful dealing in lottery bonds).

289 Re Thomas Edward Brinsmead & Sons [1897] 1 Ch 406 (CA) (company formed to make pianos which would be passed off as being made by a more established firm).

290 [1916] 2 Ch 426 (CA).

291 Re German Date Coffee Co (1882) 20 ChD 169 (CA) (company formed to take advantage of a patent that was never granted).

292 CA 2006, s 31(1).

293 Loch v John Blackwood Ltd [1924] AC 783 (PC) 788 (Lord Shaw).

294 ibid.

295 Re Worldhams Park Golf Course Ltd [1988] 1 BCLC 554 (Ch).

296 Re Concrete Column Clamps Ltd [1953] 4 DLR 60.

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297 Thomson v Drysdale 1925 SC 311.

298 Re HR Harmer Ltd [1959] 1 WLR 62 (CA). Note that the petitioner did not seek a winding-up order, so one was not granted. However, the Court did state that winding up would be justified.

299 Re Five Minute Car Wash Service Ltd [1966] 1 WLR 745 (Ch).

300 IA 1986, s 79(1).

301 Re Rica Gold Washing Co (1879) 11 ChD 36 (CA) 43 (Jessel MR).

302 Re Othery Construction Ltd [1966] 1 WLR 69 (Ch) 72 (Buckley J).

303 Re Chesterfield Catering Co Ltd [1977] Ch 373 (Ch) 380.

304 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL) 387 (Lord Cross).

305 ibid.

306 Re a Company (No 0089 of 1894) [1894] 2 Ch 349 (Ch).

307 [1973] AC 360 (HL) 379.

308 ibid.

309 ibid 380 (Lord Wilberforce).

310 See e.g. Re Davis and Collett Ltd [1935] Ch 693 (Ch); Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413 (PC).

311 Re a Company (No 002567 of 1982) [1983] 1 WLR 927 (Ch). Note, however, that this is not a blanket rule and a petitioner may be acting reasonably if he refuses to sell his shares, such as where the mechanism for valuing the shares results in a risk that the shares would be sold at a discount (Virdi v Abbey Leisure Ltd [1990] BCC 60 (CA)).

312 IA 1986, s 129(2).

313 ibid s 127(1) (discussed at 23.1.2.4).

314 See e.g. Hawkes v Cuddy [2009] EWCA Civ 291, [2010] BCC 597.

315 Derek French, Mayson, French & Ryan on Company Law (35th edn, OUP 2018) 587.

316 Practice Direction (Companies Court: Contributory’s Petition) [1990] 1 WLR 490 (Ch).