Unfair Prejudice Petitions: some tricks of the trade

1. Unfair Prejudice Petitions: some tricks of the trade Daniel Lightman QC 20 June 2019

2. Overview • Minority shareholder protections: • derivative claim • just and equitable winding up • unfair prejudice petition • Powerful remedy – flexible and wide jurisdiction: • range of relief available • range of parties against whom relief can be granted

3. Statutory Framework – section 994 “(1) A member of a company may apply to the court by petition for an order under this Part 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.” • Each element of the test is broadly construed: • Act/omission of the company, or conduct of the company’s affairs; and • Prejudicial to the interests of members (generally, or at least the petitioner); • Unfair.

4. Flexible jurisdiction “… an elastic quality which enables the courts to mould the concepts of unfair prejudice according to the circumstances of the case.” Arden LJ in In re Macro (Ipswich) Ltd [1994] 2 BCLC 354, at [404]. “The advantage of [section 994] is that the court’s power to grant relief is wide and flexible, and extends beyond the relief which could be granted, say, in an action for breach of contract. However, it is a purely statutory jurisdiction. That means, in particular, that it cannot be exercised unless the requirements of s.994(1) are fulfilled.” Arden LJ in Re Coroin Ltd [2013] 2 BCLC 583, at [11].

5. Statutory Framework – section 996 • Court only has jurisdiction to grant relief if it is satisfied that the petition is well founded. • Wide discretion under section 996(1): “If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.” • Section 996(2) provides specific examples “without prejudice to the generality of subsection (1)”.

6. What Orders can the Court make? • No limit in terms of the language of section 996. • Share purchase orders “almost the norm”. • But increasing exercise of power to order other types of relief: “the court should not close its mind to a bespoke solution to a particular form of unfair prejudice, other than by ordering a buy-out at least in cases where a remedy that leaves the warring parties as shareholders in the same company does not of itself perpetuate an impossible relationship of joint management, or otherwise risk aggravating an existing dispute.” (Sikorski v Sikorski [2012] EWHC 1613 (Ch), at [75], per Briggs J).

7. Share purchase orders • desirable • where there is a need to exit – breakdown in trust and confidence/company being mismanaged; • where financially most advantageous. • flexible approach – court has power to • disapply in whole/part the (often substantial) discount ordinarily applicable to a minority shareholding; • adjust date of valuation backwards or forwards in favour of one party or the other; and • adjust share values to compensate for the effect of wrongdoing.

8. Other orders – financial remedies • Payment of damages • to the company: Gamlestaden Fastigheter AB v Baltic Partners Ltd [2008] 1 BCLC 468 (PC), at [27], [28]; or • to the petitioner: Atlasview Ltd v Brightview Ltd [2004] BCC 542, at [55]; Wootliff v Rushton-Turner [2018] 1 BCLC 48, at [34]. • Repayment to the company’s subsidiary of monies improperly paid out by it, plus interest: Corram v Butters [2017] EWHC 2294 (Ch), at [317]. • Restoration to the company of the diminution in shareholders’ funds attributable to respondent’s undercharging of the company’s tenant: Sikorski v Sikorski [2012] EWHC 1613 (Ch).

9. Other orders – non-financial remedies • The appointment of independent management to investigate and pursue past malfeasances: Re Spargos Mining NL (1990) 3 ACSR 1. • A demerger - a division of the company’s assets between its shareholders: Bhullar v Bhullar (unrep, 25 March 2002), at [300].

10. Exercise of discretion as to type of order • Court must consider: • All possible remedies – which provides the most appropriate relief? • All of the circumstances of the case (including the conduct of the petitioner). • Proportionality of relief to unfairly prejudicial conduct: • claim to share purchase order against non-director 5% shareholder struck out: Re Pedersen (Thameside) Ltd [2018] BCC 58, at [12], [15].

11. Against whom can Orders be made? • No limit in the language of section 996(1) – “such order as it thinks fit for giving relief”. “… the unfair prejudice jurisdiction has been held to confer on the court the widest possible discretion as to the relief to be granted to a successful petitioner”: Re Sprintroom Ltd [2019] EWCA Civ 932, at [89]. • Orders can be made against: • former shareholders: Re a Company (No 005287 of 1985) [1986] BCLC 6; • directors (even if not shareholders): Atlasview Ltd v Brightview Ltd [2004] 2 BCLC 191; • third parties knowingly/improperly assisting in diversion of company funds: Lowe v Fahey [1996] 1 BCLC 262; or • recipients of monies which were improperly paid: Clark v Cutland [2003] 2 BCLC 393.

12. Against whom can Orders be made? • An order can be made against any persons, even if they have never been a director or shareholder, so long as they are: “sufficiently implicated in unfairly prejudicial conduct of a company's affairs, or who benefited or stood to benefit from it and condoned it, even if they are not the principal perpetrators” Re Edwardian Group Ltd, Estera Trust (Jersey) Ltd v Singh [2019] 1 BCLC 171, at [629].

13. What are the limits of the Court’s jurisdiction? “Where relevant conduct is carried out by a person himself or his agent there is no difficulty of attribution of responsibility for the purposes of s.994… What is the relevant test of attribution of responsibility beyond the narrow class where an agency relationship exists? In my judgment, the test is whether the defendant in a s.994 claim is so connected to the unfairly prejudicial conduct in question that it would be just, in the context of the statutory regime contained in sections 994 to 996, to grant a remedy against [him or her] in relation to that conduct… In practice, everything will depend on the facts of a particular case.” F&C Alternative Investments (Holdings) Ltd v Barthelemy (No 2) [2012] Ch 613, at [1095]-[1096].

14. What are the limits of the Court’s jurisdiction? • Fact-sensitive, practical approach. • “business realities of a situation”: F&C Alternative Investments, at [1102]. • Mere connection not sufficient, it must also be just: • respondent’s knowledge of the conduct; • respondent’s receipt of benefits from the conduct; • whether respondent and relevant company are “one” / ciphers.

15. What are the limits of the Court’s jurisdiction? “…merely being connected with the acts complained of cannot be enough. If that were the case, personal liability would be imposed in most cases because a company acts through its board of directors. As a matter of logic, more is necessary. In some circumstances, no doubt, relevant factors would be whether the company in question had been a mere cypher for the individual and whether that individual had benefitted, for example, from the diversion of the company’s business or had otherwise benefited from the unfairly prejudicial conduct.” Asplin J in Re TPD Investments Ltd [2017] EWHC 657 (Ch), at [158].

16. What are the limits of the Court’s jurisdiction? • Arguable claim relies on involvement, knowledge, or benefit - “I do not accept that the petition as it stands contains any allegation against the deceased that he was either directly or indirectly involved in conducting the affairs of the company in an unfairly prejudicial manner or assisted Mr Gourgey so do so. I not accept that it is alleged that deceased knowingly received either directly or indirectly the or any part of the proceeds of such misconduct by Mr Gourgey. It is noteworthy that there is no allegation of any sort of knowledge on the part of the deceased concerning Mr Gourgey’s misconduct… In my judgment it is plain and obvious that a trial judge will not grant the relief claimed against the deceased’s estate on the basis of the allegations made.” Re Pedersen (Thameside) Ltd [2018] BCC 58, at [14], [15].

17. What are the limits of the Court’s jurisdiction? • Claim for relief struck out where: • no allegation that the relevant respondent had knowledge of, or benefited from, the relevant conduct: Re Bankside Hotels Ltd [2019] 1 BCLC 434; and • no allegation that the respondent shareholder had knowledge of the relevant director’s wrongdoing, but an allegation that had they been aware they would have taken no remedial steps: Re G & G Properties Ltd [2018] EWHC 2807 (Ch). • Relief against trustee shareholder refused where trustee had no knowledge of the relevant conduct, and had been misled by the director: Re Edwardian (Estera v Singh) [2019] 1 BCLC 171.

18. Other relevant factors? • Business reality – number of shareholders/directors, size of interest, personal level of expertise, means and resources of each party? • Analogy with relief from liability under section 1157 of the Companies Act 2006 / section 61 of the Trustee Act 1925? • Dreamvar (UK) Ltd v Mishcon de Reya (A Firm) [2016] EWHC 3316 (Ch) – when considering whether to relieve a buyer’s solicitors of liability for breach of trust, the court considered it was a relevant factor that the buyer had no practical remedy against any other party, and that the solicitor would be better able to absorb the relevant loss than the buyer in light of the latter’s financial position. • On appeal, this was questioned, but it was nonetheless accepted as a factor the judge was entitled to take into account: P&P Property Ltd v Owen White & Catlin LLP; Dreamvar (UK) Ltd v Mishcon de Reya [2018] 3 WLR 1244, at [111] (Patten LJ).

19. Practical steps for petitioners • Relief claimed against whom? • Consider the relevant factors; • Means of each party; • Plead properly arguable case in relation to each respondent, or liable to claim against a particular respondent being struck out: Re Pedersen, at [14]. • Clear and specific pleadings important particularly because of the wide jurisdiction – petition plays a vital role in defining the basis of the petitioner’s case: Re Coroin Ltd [2013] 2 BCLC 583, at [57] (David Richards J). • Even if defence to petition struck out: • strike-out risk remains; • court must proceed to trial to satisfy itself that relief should be granted.

20. Practical steps for petitioners • Apex Global Management Ltd v Fi Call Ltd [2014] BCC 286 • Petitioner was concerned that majority shareholder and the other director (the servant of a Saudi Prince, Abdulaziz, on whose instructions he acted) would not have the resources to buy it out and/or would seek to absolve themselves of responsibility. • Petitioner therefore also claimed relief against the Prince Abdulaziz and (because it was unclear whether Prince Abdulaziz had the resources to purchase the petitioner’s shares) against his father, Prince Mishal, alleged to be the ultimate puppet-master. • Princes’ application to set aside permission to serve them out of the jurisdiction was dismissed by Vos J – claims against them were at least arguable and: “… where the most serious allegations… are in issue, it would be singularly inappropriate to proceed to trial without the main protagonists being joined as parties to the proceedings, unless there was no serious case to be tried… it would leave the court with one hand tied behind its back if all the alleged wrongdoers were not parties to the proceedings.”

21. “In my judgment, these authorities all speak with one voice. They show that ss.994–996 provide a wide and flexible remedy where the affairs of a company have been conducted in a manner that is unfairly prejudicial to the interests of some or all of its members. A s.994 petition is appropriate where, for whatever reasons, the trust and confidence of the parties to a quasi-partnership has broken down. Relief can be granted to remedy wrongs done to the company, and in such a situation the alleged wrongdoers must be made parties to the petition. Non-members of a company who are alleged to have been responsible for such conduct can be joined as respondents, and, in an appropriate case, such non-members can be made primarily or secondarily liable to buy the petitioners’ shares. Artificial limitations should not be introduced to reduce the effective nature of the remedy introduced by ss.994–996.” Vos J in Apex Global Management Ltd v Fi Call Ltd [2014] BCC 286, at [125]

22. Practical steps for petitioners • How wide should you cast the net? • increased likelihood of obtaining effective remedy vs increased costs exposure; • risk of a respondent pushing blame onto a non-party. • Parties who have taken no active steps: • Passivity may be a breach of director’s duties; • Whillock v Henderson [2009] BCC 314, at [15]; • Re AMT Coffee Limited [2019] EWHC 46 (Ch), at [220].

23. Practical steps for respondents • Shareholder disputes – are you beyond reach of a petition? • Strike-out: • available even where defence struck out; • consider allegations pleaded against your particular client, not just the general allegations of unfair prejudice; • Pedersen; • Bankside. • Part 20 additional claim: Apex Global Management Ltd v Fi Call Ltd [2014] BCC 286.

24. Practical steps for respondents • Apportionment of liability: • court must consider the respondents’ relative culpability; • court can adjust the extent of the parties’ liability by reference to overall circumstances; • Sudicka v Morgan [2019] EWHC 311 (Ch) – the joint and several liability of one of the four respondents against whom a share purchase order was made was limited to 1/3 of the sum due.

25. Practical steps for respondents • Justice and proportionality of the relief in all the circumstances: • petitioner’s conduct: VB Football Assets v Blackpool Football Club (Properties) Ltd (formerly Segesta Ltd) [2017] EWHC 2767 (Ch), at [452]; • need for careful control of wide jurisdiction to avoid oppression: Re a Company (No 007623 of 1984) [1986] BCLC 362, at 367 (Hoffmann J), cited with approval by Neill LJ in Re Saul D Harrison & Sons plc [1994] BCLC 14, at 31; and • proportionality of relief to the unfairly prejudicial conduct: RePedersen, at [12].

26. Daniel Lightman QC DLightman@serlecourt.co.uk Eleni Dinenis EDinenis@serlecourt.co.uk