Unfair Prejudice Petitions Guide

What is Unfair Prejudice?

“Unfair prejudice” refers to conduct that unfairly harms the interests of shareholders or members of a company. In the context of corporate law, unfair prejudice typically arises when one or more shareholders or members suffer a disadvantageous impact due to actions, decisions, or omissions by others within the company. This prejudice may involve breaches of fiduciary duty, mismanagement, or actions that undermine the legitimate expectations of shareholders or members.

The concept of unfair prejudice is often invoked by shareholders or members who believe their interests have been unfairly compromised by the company’s management or other shareholders. Remedies for unfair prejudice may include seeking court intervention to rectify the situation, such as ordering the purchase of shares, regulating the company’s affairs, or taking other measures to address the harm caused by the unfair conduct.

Shareholders of a company often face unfair prejudice due to actions by directors or other shareholders. The unfair prejudice jurisdiction has historically been used by minority shareholders to protect their interests but has a broader application. The underlying policy is that courts are cautious about intervening in commercial decisions and business operations.

In a recent case, Loveridge v. Loveridge, the dispute arose within successful caravan park businesses owned by Mrs. and Mr. Loveridge (Ivy and Alldey) and their children, including their eldest son Michael. Michael alleged that his parents were excluding him from management and sought relief under the Companies Act 2006 s.994 for unfairly prejudicial conduct. Alternatively, he pursued the winding-up of the companies under the Insolvency Act 1986 Pt IV s.122(1)(g) as just and equitable.

The Court of Appeal ultimately found that Michael’s s.994 petition did not present an arguable case (Loveridge v. Loveridge [2020] EWCA Civ 1104, [2022] 2 B.C.L.C. 314, [2020] 8 WLUK 179). However, a judge allowed Michael to amend the petition and granted an interim injunction against his parents regarding certain inter-company loans pending trial. In related proceedings to wind up the partnerships, the judge made a no-costs order after Michael withdrew an application to commit his mother to prison. The appellants challenged these decisions on appeal.

The court determined that the judge should have struck out the S.994 petition instead of allowing its amendment. This ruling is significant as it clarifies the approach for assessing whether an arguable case is presented in petitions involving multiple companies considered part of the same business.

What is Unfair Prejudice Jurisdiction?

The unfair prejudice jurisdiction is defined in sections 994 (members) and 995 (Secretary of State) of the Companies Act 2006. Section 994 allows a member of a company to petition for relief in two scenarios:

• a) When the affairs of the company are being, or have been, conducted in a manner unfairly prejudicial to the interests of its members as a whole, or to a specific group of members (including the petitioner), in their capacity as such; or
• b) When an actual or proposed act or omission by the company is or would be unfairly prejudicial to the interests of its members.

Who can bring an Unfair Prejudicial petition?

Unfair prejudice petitions may be initiated by:

1. Members of a company (section 994(1), Companies Act 2006).
2. Non-members who have received shares in a company through the execution and delivery of a valid instrument of transfer (section 994(2)).
3. Non-members who have acquired shares in a company through transmission by operation of law, such as a trustee in bankruptcy of a bankrupt member or the personal representative of a deceased member (section 994(2)),.

To which companies do sections 994 and 995 of the Companies Act 2006 apply?

Sections 994 and 995 of the Companies Act 2006 apply to all companies falling within the definition provided in the Act. Case law has affirmed that these sections can also be invoked in relation to quasi-partnerships.

What is the criterion for unfair prejudice?

The test for unfair prejudice is an objective one based on established equitable principles. The petitioning shareholder is not required to demonstrate bad faith or intent to cause prejudice.

Courts will consider prejudice unfair if a reasonable bystander views it as such.

Key considerations include:

• Unfairly prejudicial conduct must relate to the company’s affairs, including management decisions that disrupt operations or shareholder attempts to exert excessive control.
• Conduct must affect members’ interests as members, especially in quasi-partnerships.
• A petition may be based on a single act, omission, or potential conduct.
• Relief requires showing both prejudice and unfairness; discrimination is not necessary.
• Fairness is assessed within the commercial relationship framework defined by the Articles of Association and shareholders’ agreements.

The starting point is whether the complained conduct aligns with shareholders’ entrusted powers, acknowledging that trivial or technical article infringements may not justify relief under Section 994.

Expectations

A member’s interest may encompass legitimate expectations arising from the company’s nature and agreements between parties.

In “quasi-partnerships,” where members anticipate participation in management and profits, establishing legitimate expectations is more feasible. However, beyond a member’s legal rights, demonstrating legitimate expectations is challenging.

If such expectations exist, a petitioner must generally demonstrate directorial abuse of powers or infringement of strict legal rights under the company’s constitution or legislation.

What's considered unfairly prejudicial conduct?

Some examples of what may constitute unfairly prejudicial conduct are:

• Breaches of fiduciary duty. Relevant prejudice caused by breaches of fiduciary duty may include damage to the parties’ relationship of trust and confidence or the misuse or misappropriation of company assets.
• Mismanagement: Whether or not mismanagement is sufficiently serious falls to be appraised by reference to the scale of any financial loss arising and the frequency and duration of acts or omissions constituting mismanagement.
• Failure to pay a certain level of dividend, which was part of the basis on which the petitioner became a member of the company without justification,.
• Payment of excessive remuneration not calculated by reference to the value of the services provided by directors who are in control of the company and is instead a disguised payment of dividend or dressed-up return of capital.
• Allotting further shares in the company for the improper purpose of diluting a minority shareholder’s shareholding.
• Inequitable conduct e.g: causing an irrevocable breakdown of trust and confidence in a quasi-partnership, entered into on the basis of mutual duties of good faith, trust, disclosure and co-operation in the strategic operations of a group of companies, by seeking to take control of the company; exclusion from management where participation was part of the arrangement between shareholders and such exclusion is not justified by the petitioner’s misconduct or otherwise; failure to consult with, or provide information to, a petitioner where it was agreed that the petitioner would be consulted or provided with such information; the diversion of business to another company in which the majority shareholder holds an interest; the removal of a company’s auditor if done on the grounds of a divergence of opinion on accounting treatments or audit procedures, or on any other improper grounds.
• Abuses of power and breaches of the Articles of Association. For example, the passing of a special resolution to alter the company’s articles may be unfairly prejudicial conduct if such alterations would affect the petitioner’s legitimate expectation that he would participate in the management of the company. Also, repeated failures to hold AGMs; delaying accounts, and depriving the members of their right to know the state of the company’s affairs may all be unfairly prejudicial to a member’s interests.

The conduct of the petitioner is relevant, as the conduct complained of may be found to be prejudicial but not “unfair”. The petitioner’s conduct may also affect the relief granted by the court.

What remedies are there?

Section 996 of the Companies Act 2006 enumerates specific types of court orders that may be issued if unfair prejudice is established, with the court retaining discretion to issue any appropriate order under Section 996(1).

The powers outlined in Section 996(2) empower the court to:

• Regulate the company’s future conduct.
• Mandate the company to cease or rectify complained acts or omissions.
• Authorise civil proceedings to be initiated on behalf of the company, with terms directed by the court.
• Restrict the company from altering its articles without court permission.
• Facilitate the share purchase of aggrieved members by other members or the company, with a capital reduction if shares are repurchased by the company.

From a cost perspective, the authority to initiate civil proceedings with court-directed terms can be particularly beneficial, shifting the financial burden to the company rather than the petitioner.

In practice, the most common remedy granted to successful petitioners is the purchase of their shares by those responsible for the unfair prejudice.

How to bring an unfair prejudice petition?

Unfair prejudice court proceedings commence with the filing of a petition.

The petition must clearly outline the grounds for its presentation and the relief sought by the petitioner (typically a shareholder initiating the claim).

The court will then schedule a hearing date for all parties involved to attend or provide procedural directions regarding the petition.

Interlocutory relief may be granted to safeguard the company’s and petitioner’s interests until the petition is heard.

Respondents to the petition

The petition should name as respondents the shareholders or directors accused of unfair conduct, along with all affected members of the company or those who would be impacted by a court order resulting from the alleged misconduct.

Additionally, a third party not affiliated with the company may be included if they could be affected by the remedy sought or were directly involved in the alleged unfair conduct.

The company itself is typically listed as a respondent, albeit largely in a nominal capacity.

It’s crucial to note that communications between the company and its legal representatives may not be protected from disclosure in Section 994 proceedings.

Are any alternative remedies available?

Certainly, there are alternative shareholder remedies that should be considered based on the circumstances. These remedies might be more suitable for a shareholder’s situation than an unfair prejudice petition, which can be complex. Additionally, they can be presented as supplementary arguments or claims alongside a Section 994 petition.

Alternative remedies include:

• “Just and equitable” winding-up under Section 122(1)(g) of the Insolvency Act 1986.
• Derivative action under Sections 260–264 of the Companies Act 2006.

Takeaway

The Loveridge judgement highlights the importance of assessing each case based on its unique circumstances and examining the nature and structure of the company or group of companies involved. In Michael’s petition, he sought to treat all the companies and partnerships as a unified group, overlooking the distinct positions of each of the five companies. Both judges emphasised the importance of respecting the organisational forms chosen by the parties to manage their affairs. Even if there is a single business entity, it does not negate the need to consider each company’s position individually when assessing a petition.

It is evident that petitions must be meticulously prepared with well-reasoned arguments demonstrating the unfair prejudice caused by the conduct, act, or omission in question. The petitioner typically needs to demonstrate an actual breach of agreed-upon terms governing how the company should operate or show that these terms were being utilised in a manner contrary to equitable principles.