Issues in Unfair Prejudice Petitions 1

In this series of blog posts, Anna Lintner analyses aspects of unfair prejudice petitions.

Section 994(1) of the Companies Act 2006 provides a mechanism for obtaining relief where a shareholder can establish that: (a) “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)”; and/or (b) “an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.” (Emphasis added).

What, then, constitutes conduct of the company’s affairs or an act or omission of the company in this context?

In the majority of unfair prejudice petitions there will be no dispute as to this requirement of s.994(1). Where the directors of a company take steps in their capacity as controllers of the company, or cause the company to take a particular act, this will ordinarily amount to conduct of the affairs of the company and/or an act or omission of the company. Similarly, where the shareholders acting in general meeting pass a resolution, this will usually also amount to an act of the company. However, it is worth bearing in mind the following points when considering whether acts or conduct complained of fall within the Court’s jurisdiction under s.994:

• It is necessary to distinguish between the conduct by shareholders of their own affairs and the conduct of the affairs of the company. As David Richards J (as he then was) held at first instance in Re Coroin Ltd [2012] EWHC 2343 (Ch) at [626]: “The section is not directed to the activities of shareholders amongst themselves, unless those activities translate into acts or omissions of the company or the conduct of its affairs. Relations between shareholders inter se are adequately governed by the law of contract and tort, including where appropriate the ability to enforce personal rights conferred by a company’s articles of association.”
• The act or conduct complained of can be an isolated incident; the petitioner is not required to establish a course of conduct. However, a single isolated incident will need to be sufficiently unfair or serious in order for the Court to conclude that has caused actionable prejudice to the petitioner’s interests.
• The Court has jurisdiction under s.994 in relation to proposed or threatened acts or conduct. However there is always a risk that, following presentation of an unfair prejudice petition, the threatened act may be withdrawn or avoided. In Re Astec (BSR) plc [1999] BCC 59, a threat to cease the payment of dividends was held to be in principle capable of amounting to unfairly prejudicial conduct, but was not on the facts of the case unfairly prejudicial conduct because the threat had been resiled from prior to trial (see the judgment of Jonathan Parker J at 72).
• In determining what constitutes the affairs of the company, the Court will generally take a liberal approach. The Court looks at “the business realities of a situation and does not confine them to a narrow legalistic view”: Re Neath Rugby Ltd (No.2) [2009] 2 BCLC 427 per Stanley Burton LJ at [50].
• The affairs of a company can sometimes include the affairs of its subsidiaries, particularly where there are common directors of the parent and subsidiary. This will be relevant where, for example, the petitioner holds shares in a parent holding company, but the business of the group is conducted through subsidiary companies within the group and the affairs of the subsidiary are being conducted in a manner which damages the value of the subsidiary and hence the value of the holding company’s interest in the subsidiary. See, for example: Gross v Rackind [2005] 1 WLR 3505, in which a holding company had been interposed between the shareholders and the trading companies; and Re The Stratos Club Ltd [2020] EWHC 3485 (Ch), in which the director asset-stripped subsidiaries, thereby rendering valueless the parent company in which the Petitioner was a shareholder. See also Re Coroin Ltd [2012] EWHC 2343 (Ch) at first instance at [628].
• Similarly, the conduct of the affairs of a parent company can constitute the conduct of the affairs of the subsidiary. In Nicholas v Soundcraft Electronics [1993] BCLC 360, the Court of Appeal held that a parent company’s failure to pay its debts due to its subsidiary – in which the petitioner was a shareholder – was capable of amounting to conduct of the affairs of the subsidiary in the context of the way in which the businesses of the parent and subsidiary were administered together.

In the next post in the series, Anna Lintner will look at the issue of unfairness in unfair prejudice petitions.