Section 994 and s.122(1)(g) Exam Notes PDF

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Section 994(1) CA 2006 The petitioner must establish that his or her interests as a member have been unfairly prejudiced. A member of a company may apply to the court petition for an on the ground (a) that the affairs are being or have been conducted in a manner which is unfairly prejudicial to the ...

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Section 994(1) CA 2006 The petitioner must establish that his or her interests as a member have been unfairly prejudiced.

A member of a company may apply to the court by petition for an order… on the ground (a) that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself), or

An interest in maintaining the value of his or her shares - Re Bovey Hotel Ventures Expectation that they will continue to participate in management - Re Ghyll Beck Driving Range Ltd

Elder v Elder – C’s interest as a member has not been prejudiced, hence C (who was ousted as a director of the company) may not bring such a petition, when a nonmember interest is affected – unless quasi-partnership

(b) that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

3. Note:

Company’s affairs - flexible approach - Nicholas v Soundcraft Electronics - failure of a parent company to pay debts due to its subsidiary (in which the petitioner was a minority shareholder) constituted acts done in the conduct of the affairs of the co.

For example, exclusion from the management of the company, which is conduct affecting the petitioner qua director, will suffice - O’Neill v Phillips

_________________________________________________ 1st requirement: Interests as a member What are interests as a member? 1. Starting point: Matters in agreements (eg AA, shareholders’ agreement) - Ebrahimi v Westbourne Galleries – L.Wilberforce But if there is, there will be other avenue of suing already. 2. General equitable duty Purposes of s.994 - the court can apply equitable restraints to contractual rights - O’Neil v Phillips 3 situations in which equitable considerations could be ‘superimposed’ - Ebrahimi v Westbourne Galleries, L.Wilberforce 1. Where there is a personal relationship between shareholders which involves mutual confidence. 2. Where there is an agreement that some or all should participate in the management. 3. Where there are restrictions on the transfer of shares which would prevent a member from realising his or her investment. Not just rights as a member (exhaustive)

Conduct which forms the basis of complaint need not affect him in his capacity as a member - although the petitioner must be a shareholder to sue

Need to refer to the commercial relationship between the parties - not arbitrary justice - Re Saul D Harrison & Sons _________________________________________________ 2nd requirement: Unfairly prejudiced Ex p Schwarcz (No 2) - must be ‘unfair’ & ‘prejudicial’ (harmful) Jenkins Committee (1962) – para 204 ‘a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a co. is entitled to rely’

O’Neil v Phillips Partnership – treated as a contract of good faith by equity Facts: P gave O 25% of shares from the 100% shares he had. P waived his dividend for 75%. O and P got 50% profit each. P promised to let O became sole director. P retired.

(b) P’s refusal to allot additional shares - not unfair - the negotiations were not completed and no contractual undertaking had been entered into by the parties. Although O argued that he had lost trust in P, that alone could not form the basis for a petition under the unfairly prejudicial conduct provision.

Company flourished.

To hold otherwise would be to confer on a minority shareholder a unilateral right to withdraw his capital.

But later, the company did not do well.

O’s petition therefore failed. He did not prove that P’s conduct was both unfair and prejudicial.

P took over back the company. P used his majority voting rights to appoint himself managing director and took over the management of the company. (a) O was informed that he would no longer receive 50 per cent of the profits but his entitlement would be limited to his salary and dividends on his 25 per cent shareholding. (b) Early discussions about further share incentives when certain targets were met were aborted.

Other UPC Majority fail to hold meetings for the minority - unfairly prejudicial to the interests of the minority - Fisher v Cadman Exclusion from management, which is a typical s.994 complaint - Re Ghyll Beck Driving Range

O sued for unfair prejudicial conduct of P.

Mismanagement (breach of the directors’ duties of care and skill) - Re Elgindata Ltd

What is O complaining about?

Excessive remuneration taken by the directors and the failure to pay dividends - Re Sam Weller & Sons

(a) Termination of the equal profit-sharing (b) P’s refusal to allot additional shares - Not about dismissal of directorship. (He was not dismissed as a director. If dismissed, there could be breach of legitimate expectation – O is expected to involve in the operation of the business and had been given shares for it – there is some kind of contractual basis.) Is there a legitimate expectation?

Held: (HOL) Lord Hoffman held that “legitimate expectation” must be found on some contractual basis/agreement/understanding, regardless of whether such agreement is formal/in writing or otherwise, legal/enforceable or otherwise, or that they specifically relied on. The House of Lords found that P’s conduct would have been unfair had he used his majority voting power to exclude O from the business. He had not done this, but had simply revised the terms of O’s remuneration. (a) Termination of the equal profit-sharing – not unfair - was never formalised and it was, in any case, conditional upon O running the business. That condition was no longer fulfilled as P had to assume control over the running of the business.

Breach of fiduciary duties – the case law shows that s.994 may be used to obtain a personal remedy despite the rule in Foss v Harbottle - Re London School of Electronics

Not UPC Mere breakdown in relationship between the shareholders (which is not caused by conduct in the company’s affairs that is unfairly prejudicial) is insufficient - Hawkes v Cuddy (No 2) [2009] CA - (although such a breakdown might, if sufficiently serious, justify a winding up order under s.122(1)(g) Insolvency Act 1986) No expectation on the part of the petitioner that should relations break down the article would not be followed, even if it is a compulsory acquisition of his shares that majority shareholders’ passed by resolution. - Re a Company (1986) (Q: So is alteration of AA a gateway to go against minority’s right?)

Remedies – s.996

Share buy out

Very wide ranging

Method of valuation

(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.

GR: Minority block, minority discount – discounted valuation - Re Elgindata, Orvine v Irvine

At the discretion of the court

Exp: Pro rata basis – Re Bird Percission (50/50 shareholding – Ng v Crabtree)

(2) Without prejudice to the generality of subsection (1), the court's order may—

Note:

(a) regulate the conduct of the company's affairs in the future; (appoint judicial manager)

Valuation with premium (very rare) – to buy off the majority block of shares

(b) require the company—

Valuation with discount – normally there is discount for the minority

(i)to refrain from doing or continuing an act complained of, or (ii)to do an act that the petitioner has complained it has omitted to do;

Pro rata valuation – take the company’s nett value and divide by the amount of shares to be sold

(c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;

Time of valuation

(d) require the company not to make any, or any specified, alterations in its articles without the leave of the court;

Exp: Re Cumana – as the petition – if there is dilution of company’s value – cuz it would not be fair to the petitioner (cuz company’s value will drop after the petition filed)

(e) provide 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, the reduction of the company's capital accordingly. (share buy out order – ask other shareholders to buy of the other shareholders)

GR: Re Elgindata – as the date of court order

Affirmed by Re KR Hardy Estates (2014) – GR is as per Re Elgindata, but subject to exceptions

S. 122(1)(g) IA 1986 : Winding up on just and equitable grounds (means of final resort) (for ending) s.112(1) A company may be wound up by the court if (g) the court is of the opinion that it is just and equitable that the company should be wound up.

The provision derives from partnership law, where the court had equitable jurisdiction to dissolve a partnership where relations had broken down between the partners, and the only alternative was to dissolve the business.

Ground of s.122(1)(g) 1. Re Yenidje Tobacco - A deadlock in the management may constitute just and equitable ground to wind up co. If the relationship between the parties has broken down with no hope of reconciliation, the court may order a dissolution. 2. Ebrahimi v Westbourne Galleries – breach of members’ legitimate expectation – premised on a relationship of mutual trust and confidence, such as a relationship of quasi partnership, may constitute just and equitable ground to wind up the company. 3. Loch v Blackwood / ex parte Glossop – Lack of confidence and probity in the management of the company may constitute just and equitable ground to wind up the company. 4. Re A Company (not applicable anymore) – Consistent nonpayment of dividend despite profitability may lead to sufficient to wind up the company.

Ebrahimi v Westbourne Galleries Ltd N and E managed the company for 10 years. N’s son joined. Later N and son quarreled with E, and removed him as director.

Held: Though E was removed according to CA 2006 and AA, the courts have the power to take equitable considerations in exercising s.122(1)(g) on the just and equitable ground. Since E had agreed to the formation of the company on the basis that the essence of their business relationship would remain the same as with their prior partnership, his exclusion from the company’s management was clearly in breach of that understanding. It was therefore just and equitable to wind up the company.

Typical elements in s.122(1)(g) petitions – Lord WIlberforce - The basis of the business association was a personal relationship and mutual confidence (generally found where a pre-existing partnership has converted into a limited company). - An understanding that all or certain shareholders (excluding ‘sleeping’ partners) will participate in management. - There was a restriction on the transfer of members’ interests preventing the petitioner leaving.

‘Just and equitable’ are: 5. Fraud - enable shareholders to recover their investment, where the company was formed by its promoters in order to perpetrate a fraud against them (Re Thomas Edward Brinsmead & Sons [1887]) 6. The company’s substratum has failed. The petitioner will need to establish that the commercial object for which the company was formed has failed or has been fulfilled. Re German Date Coffee Co (1882) Virdi v Abbey Leisure Ltd [1990] Re Perfectair Holdings Ltd [1990]

Quasi-partnership Akin to partnerships Because the personal relationships between the directors (who generally have a number of roles, for example as both shareholders and employees) are so crucial to the effective operation of the company’s business That if confidence breaks down between them the company is effectively disabled.

“…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…”

Lord Cross - petitioners should come to court with ‘clean hands’ - If a petitioner’s own misconduct led to the breakdown in relations relief will be denied.

s.125(2) The petition may be struck out (s.125(2) IA 1986) where the petitioner is acting asking for winding up, instead of seeking an alternative remedy (such as a purchase of their shares, or an order under s.994 CA 2006)...