Company Law Supervision 8 Unfair Prejudice notes PDF

Preview

Summary

Unfair prejudice.
This is 1 of 9 content supervisions for the Company law course (one-ninth of entire course)....

Description

Company Law Supervision 8: Unfair Prejudice & Just and Equitable Winding Up Contents G&D Chapter 20: Unfair Prejudice................................................................................................................... 3 Introduction......................................................................................................................................................... 3 Scope of the provisions..................................................................................................................................... 4 Independent Illegality and Legitimate Expectations or Equitable Considerations...............4 Informal arrangements among the members.................................................................................. 4 Balance between dividends and directors’ pay................................................................................ 6 Other categories of unfair prejudice..................................................................................................... 6 Prejudice and Unfairness................................................................................................................................ 7 Unfairness Prejudices and the Derivative Action.................................................................................. 7 Reducing Litigation Costs............................................................................................................................... 8 Remedies................................................................................................................................................................ 9 Winding up on Just and Equitable Grounds......................................................................................... 10 Conclusion........................................................................................................................................................... 10 Unfair prejudice remedy (S994 petition)................................................................................................... 11 Can be against a third party....................................................................................................................... 11 Re Little Olympian (No 3) [1995] 1 BCLC 636............................................................................... 11 Must concern the company’s affairs........................................................................................................ 11 Re Unisoft (No 3) [1994] 4 BCC 596................................................................................................... 11 The petitioner must show unfair prejudice in the capacity as a member...............................11 Re JE Cade and Sons [1992] BCLC 213.............................................................................................. 11 Re A Company [1988] 4 BCC 506......................................................................................................... 11 Gamlestaden Fastigheter v Baltic Partners Ltd & Others [2007] 4 All ER 164................12 What amounts to unfairly prejudicial conduct?................................................................................ 12 O’Neill v Phillips [1999] 1 WLR 1092................................................................................................. 12 Re Tobian Properties [2012] EWCA Civ 998................................................................................... 13 Re Coroin Ltd [2012] EWHC 2343....................................................................................................... 13 If justified, prejudicial conduct may not be unfair............................................................................ 14 Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273................................................................. 14 1|Page

Grace v Biagoli [2006] BCC 85.............................................................................................................. 14 Re London School of Electronics [1986] Ch 211............................................................................ 14 Unlawful conduct can amount to unfair prejudice...........................................................................15 Re Macro (Ipswich) [1994] 2 BCLC 354............................................................................................ 15 Re Baumler Ltd [2005] 1 BCLC 92....................................................................................................... 15 Clark v Cutland [2003] 2 BCLC 393.................................................................................................... 15 Re DR Chemicals Ltd [1989] 5 BCC 39............................................................................................... 16 Re Citco Banking [2007] UKPC 13....................................................................................................... 16 Equitable considerations may affect a finding of unfair prejudice............................................16 Who this applies to.................................................................................................................................... 16 Contractual frustration............................................................................................................................ 16 Failure to pay a dividend......................................................................................................................... 17 Exclusion from Management................................................................................................................. 17 Inequitable issuance of shares.............................................................................................................. 18 Ability to contract out of S994.............................................................................................................. 18 Remedies: S996...................................................................................................................................................... 18 Order a buy-out (most common remedy).............................................................................................. 18 London School of Electronics................................................................................................................. 18 McCarthy Surfacing................................................................................................................................... 18 Croly v Good [2010] 2 BCLC 569.......................................................................................................... 18 Scottish CWS v Meyer [1959] AC 324................................................................................................. 19 Profinance Trust SA v Gladstone [2002] 1 BCLC 141..................................................................19 Annacott Holdings Ltd [2012] EWCA Civ 998................................................................................20 Orr v DS Orr & Sons (Holdings) Ltd [2013] CSOH 116................................................................20 Authorise a derivative action..................................................................................................................... 20 S996(2)(c) Powers of the court under this Part............................................................................20 When can the court use a corporate remedy?..................................................................................... 20 Re Charnley Davies [1990] BCLC 760................................................................................................ 20 Bhullar v Bhullar........................................................................................................................................ 20 Nina Kung v Tan Man Kou [2004] HKFCA 73, sub nom Re Chime Corp..............................21 Hannigan, Drawing Boundaries between Derivative Claims and Unfairly Prejudicial Conduct [2009] JBL 606................................................................................................................................ 21 Introduction.................................................................................................................................................. 21 Corporate wrongs – the orthodox view............................................................................................. 21 Conclusion...................................................................................................................................................... 22 2|Page

Just and Equitable Winding Up...................................................................................................................... 23 S122(1)(g) Insolvency Act 1986................................................................................................................ 23 Re Guidezone Ltd [200] BCLC 321 at [168] to [180]........................................................................23 Ebrahimi v Westbourne Galleries [2009] EWCA Civ 261................................................................23 Hawkes v Cuddy (supra)............................................................................................................................... 24 Questions.................................................................................................................................................................. 24

G&D Chapter 20: Unfair Prejudice Introduction Statutory unfair prejudice provisions are wide-ranging and much more extensive than derivative claim provisions. S994(1) [Pt 30] – any member may petition court for relief for unfair prejudice: (a) That the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of members generally or some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including any act or omission on its behalf) is or would be so prejudicial This is the same as S459 in CA 1985. Who can sue: Controlling shareholders are not expressly excluded from bringing such a claim but their normal remedy would be to make use of resolutions etc – by virtue of their controlling position it is highly unlikely that they can be said to be unfairly prejudiced by the minority: Re Legal Cost Negotiators Ltd [1999]. S994 says (minority) shareholders can sue but S994(2) extends this right to those to whom shares have been transferred who are to become members or those who own shares by operation of law (but do not appear on the books eg administrator of an estate). This is useful in small companies where the directors may unreasonably refuse to register a share transfer by misusing their AoA discretion. However, the beneficial owner of shares cannot bring proceedings – need to get nominee to do so (or trustee) – Atlasview Ltd v Brightview Ltd [2004]. This right is extended to creditors when an administration order is in force – Para 74, Sched B1 Insolvency Act 1986. What is captured: Reference is made to conduct of the company’s affairs – wide enough to catch the actions of controllers, whether or not they are directors, shareholders or both. The actions of corporate groups can be brought within the remit of the Act too. However, action strictly 3|Page

qua shareholder eg voting in AGM is expressly excluded by the Act. Actions of parent company can be attributed to subsidiary – Nicholas v Soundcraft Electronics Ltd [1993]. When first introduced, this section was disliked by judges who have traditionally preferred a less interventionist approach – Lord President Cooper per Scottish Insurance Corp v Wilsons & Clyde Coal Co [1948].

Scope of the provisions Right to petition deliberately drafted in wide terms – first issue therefore to define scope of Act. Suggested that three main question have arisen: 





Should reference to conduct which is unfairly prejudicial to the ‘interests of members’ be interpreted as referring only to their interests ‘as members’? This would accord with the narrow approach taken to enforcing rights of members under the statutory AoA contract and was applied in eg expulsion of a minority shareholder from the board being treated as technically something that is qua director not qua member but is factually unfairly prejudicial – Re Lundie Bros [1965]. Courts nowadays take a wider approach – in a small company especially, the member’s expected return on investment should have included director’s fees or there was an expectation of a NED role so as to monitor his investment – Re A Company [1983]. This is now settled law. Should the sections be simply aimed at providing a more effective way of remedying harms which, independently or their unfair prejudice, are in any case unlawful? Or should it be wider? This is the ‘independent illegality’ issue. The courts have taken a broader view – but what exactly will constitute unfair prejudice? Courts have had to become more willing to look into the private affairs of companies. What is the relationship between the unfair prejudice claim and a derivative action claim? Can a petitioner use an unfair prejudice claim to eg evade the Foss v Harbottle rule? And is recovery wrt loss suffered by company, or personal losses only?

Independent Illegality and Legitimate Expectations or Equitable Considerations Giving courts statutory power to control exercise of discretion by persons or institutions for ‘unfairness’ is a common device eg unfair dismissal. However, such open-ended legislation involves a sharing of the legislative function between Parliament and the courts. This was fairly novel for the courts in this context, which have traditionally shied away from getting involved in what they saw as the private affairs of companies. Importantly, the courts recognised that S994 covers expectations as well as rights. There has been therefore a widening to include ‘legitimate expectations’ or ‘equitable considerations’ per Lord Hoffmann in O’Neill v Philips [1999]. The courts have developed one such clear category of cases but have hinted at there being others. Informal arrangements among the members Legitimate expectations / equitable consideration – ‘arises out of a fundamental understanding between shareholders which formed the basis of their association but was not put into contractual form’ – Re Saul D Harrison & Sons Plc [1995]. This will often be 4|Page

the case in small quasi-partnership companies where the transactional costs of drafting bespoke articles are prohibitive and / or where it is simpler to let the parties work towards some understanding over time. Further, directors must act in accordance with their fiduciary duties and this may overlap with their obligations in any SHA – Saul D Harrison. Range of expectations – protected in a way which is open-ended, but the C would often most like being given (back) a seat on the board so as to be involved in management. This category of legitimate expectations depends on factual demonstration that an informal agreement or arrangement, generating the expectation relied upon, did exist outside the articles and supplementing them. AoA will be the starting point: Saul D Harrison. However, ‘something more’ will be needed to show that not the entire agreement between the parties is found in the AoA – Ebrahimi v Westbourne Galleries Ltd [1973]. This will tend to apply to unsophisticated companies with simple corporate governance – Re Coroin Ltd [2012] – David Richards J commented it was wholly inappropriate to find there to be equitable considerations in a JV of sophisticated investors who had no prior relationship and whose transactions were all well-documented and drafted with legal advice. This has been confirmed in O’Neill v Phillips per Lord Hoffmann. Note the shift to ‘equitable considerations’ – this is not necessarily a narrowing of the previous ‘legitimate expectations’ cases but signals to lower court judges that they do not have unfettered discretion in this area. Correct approach – ask whether there were equitable considerations which required the exercise of the majority’s AoA powers to be constrained by reference to an informal bargain struck between members which may not be legally enforceable per se. A ‘contractual’ approach may draw on understanding of the doctrine of frustration – O’Neill. Their lordships wanted greater legal certainty and expressly disapproved of any ‘wholly indefinite notion of fairness’ – O’Neill. They wished to discourage excessive litigation and therefore preferred a contractual approach even though the Law Commission thought this would be unduly restrictive – this was the price to pay for legal certainty. CLR endorsed the policy balance of HL. CA 2006 is a continuation of this approach. On the facts of O’Neill, there was no unfair prejudice. This case involved the founder of a company giving a trusted employee a 25% stake in the company. In exchange for acting as MD it was informally agreed that he would receive half the profits. There was some talk about increasing his holdings to 50%. There was an economic downturn and the employee was removed from the MD position and ceased to receive half the profits. This was not unfair prejudice as there was not even an informal agreement that he should continue to receive 50% of the profits even if not the MD and neither was there any agreement for him to necessarily acquire the additional 25%. The courts are unsure of what to make of their equitable jurisdiction in this sense – they know a strict illegality approach is not helpful but have largely confined themselves to informal agreement cases rather than developing guidance on what is unfair per se. Hence, in Ebrahimi, it was stated that the fact that the business was a quasi-partnership in itself did not mean that an unfair prejudice claim would lie – this merely sets the context. The 5|Page

method of the court is to treat the AoA as the starting point; any subsequent informal agreements that extend or qualify the AoA must be proved and will form the basis for the court’s intervention. Therefore, Warner J per Re JE Cade and Son Ltd [1992] said that there is no ‘third tier of rights and obligations’ based on what the judge thinks is fair and equitable – he is simply applying the ‘full’ agreement between the parties. Balance between dividends and directors’ pay Where petitioner has never been or has ceased to be a director of the company, a frequent cause of dispute would be payment of excessive remuneration to directors and the failure to declare dividends payable to shareholders. However, even in quasi-partnerships, minority shareholders have no expectation or right to receive a dividend – Irvine v Irvine (No 1) [2007]. However, if there had been an agreement that all profits of the company would be paid out one way or another and this was done through a big bonus to directors, this would be unfairly prejudicial to minority shareholders who are not also directors who would receive no dividends – Irvine. This can also apply to cases of derisory dividends per Re Sam Weller & Sons Ltd [1990], and sometimes to cases where the board has not properly directed itself to consider the question of the payment of dividends – Re McCarthy Surfacing [2008]. As dividends and directors’ bonuses are in competition, there may be a prima facie unfair prejudice claim if the directors have fixed their remuneration at a rate that is inconsistent with the AoA eg Irvine. It is proper that shareholders who act as directors should have additional remuneration beyond dividends for services rendered compared to minority shareholders without executive positions. However, objective commercial criteria can be used to decide if the remuneration of directors is excessive – look to the actual duties done by the executive directors and the market rate applicable – Irvine. Consideration of breaches of the AoA or general law in the context of unfair prejudice claims must be modified in light of parties’ own private agreements, formal and informal. Any accusation that the court is trying to interfere in the private affairs of the company is e...