Quick Guide: s.994 Companies Act Unfair Prejudice Petitions

This succinct guide provides essential insights into unfair prejudice petitions within the framework of English law. According to Section 122(1)(g) of the Insolvency Act 1986, if a minority within a company perceives oppression by the majority, they have the right to petition for the company’s winding-up on the grounds of justness and equity. However, if the minority prefers not to pursue this course of action, they have an alternative option available: to file an unfair prejudice petition under Section 994(1) of the Companies Act 2006 (the “Companies Act”).

What is Unfair Prejudice?

Unfair prejudice typically refers to actions or circumstances that unfairly disadvantage a member of a company, especially concerning the management of the company’s affairs and business. This disadvantage may arise from the actions or inactions of another member of the company. For unfair prejudice to be established, it is essential that the member’s interests have been harmed in a manner deemed unfair. Unfair prejudice comprises two main elements: “unfairness” and “prejudice”. However, it falls to the courts to determine what qualifies as “unfair” and “prejudicial”. Nonetheless, the member must demonstrate that they have suffered a loss due to unfair prejudice.

Expert UK Shareholder Dispute Lawyers

LEXLAW specialise in navigating the intricate landscape of shareholder disputes and unfair prejudice claims. With a deep understanding of company law and extensive experience in handling complex legal matters, our team is dedicated to advocating for the rights of minority shareholders who have been subjected to unjust treatment.

From meticulously analysing the circumstances surrounding unfair financial dealings to crafting compelling Section 994 petitions, we are committed to providing comprehensive legal assistance tailored to each client’s unique situation. Our goal is to empower our clients with the knowledge and resources needed to pursue effective legal remedies and secure favourable outcomes in their shareholder disputes. Trust our expertise to guide you through the complexities of the legal process and fight for the justice you deserve.

Test for Unfair Prejudice

The assessment of unfair prejudice follows an objective standard, not a subjective one. Instead of focusing on whether the majority was aware that their actions would harm a member of the company, the key enquiry is whether a reasonable person would view the majority’s actions as unfairly detrimental to the interests of the minority. It’s crucial to understand that a remedy is less probable when there’s been no violation of the terms agreed upon by the member regarding the conduct of the company’s affairs.

What is an Unfair Prejudice Petition?

An unfair prejudice petition is typically seen as a recourse for addressing minority oppression, but it’s important to note that the remedy provided by Section 994 of the Companies Act is not only specifically applicable to minority shareholders. In cases where the minority holds a controlling stake, the majority can also initiate such a petition to protect their interests. However, if the majority shareholders have the means to rectify the situation through their controlling stake, a petition filed by them in court may not be granted.

Grounds for bringing an Unfair Prejudice Petition:

Sections 994(1) and 995(2) of the Companies Act provide that the grounds for bringing an unfair prejudice petition are:

“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 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”

This implies that a member cannot file a petition unless their own interests have been adversely impacted by unfairly prejudicial conduct. Based on the aforementioned provision, two grounds for an unfair prejudice petition can be identified:

• Conducting the affairs of the company in an unfairly prejudicial manner; and
• An act or omission that is or would be unfairly prejudicial.

While both of these grounds are often present concurrently, either one is sufficient for a petition. Additionally, the provision includes proposed actions, but mere concerns about how a company’s affairs may be conducted are insufficient for the purpose of filing a petition.

Which companies are subject to Sections 994 and 995?

Petitions under Sections 994 and 995 of the Companies Act can be filed for all companies defined within the definition in the said Act. Legal precedent has established that petitions can also be initiated concerning quasi-partnerships.

Who can bring an Unfair Prejudice Petition?

An unfair prejudice petition can be initiated by a member of a company. According to Section 112 of the Companies Act, a member is defined as a subscriber to the memorandum and any other individual who agrees to become a member of the company and is listed on the register of members. This includes shareholders or non-members who have obtained shares but have not been recorded on the shareholder register, or who have acquired shares through legal means, such as being a personal representative of a deceased individual’s estate. The individual initiating this action, is formally known as ‘the petitioner’.

Although the Companies Act technically permits majority shareholders to file a claim for unfair prejudice, in practice, such petitions are rarely successful, except in rare cases where the majority shareholder lacks voting control. Typically, majority shareholders possess the authority to influence the company’s decisions and affairs, unlike minority shareholders. Hence, most unfair prejudice petitions are initiated by minority shareholders.

How to bring an Unfair Prejudice Petition?

The Civil Procedure Rules (the “CPR”), particularly as outlined in CPR Practice Direction 49A, generally governs unfair prejudice petitions. However, specific rules outlined in the Companies (Unfair Prejudice Applications) Proceedings Rules 2009, detail requirements for such petitions and their service. Under Section 994 of the Companies Act, a petition is necessary, and any other approach would be deemed a procedural flaw. The petition must clearly outline the grounds for its submission and the desired relief.

Contact us today to book a consultation conference with expert shareholder dispute lawyers.

The court is required to schedule a hearing, known as the “return day”, during which both the petitioner and any respondents, including the company, must appear before the registrar or district judge. At this hearing, directions will be provided regarding the procedure for the petition. Upon setting the return day, the court will provide the petitioner with sealed copies of the petition for service, each marked with the return day and the time of the hearing.

The petitioner is required to serve a sealed copy of the petition on the company at least 14 days before the return day. Additionally, if the petition is brought by a member of the company, the petitioner must also serve a sealed copy of the petition on every respondent named in the petition at least 14 days before the return day. On the return day or thereafter, the court will provide suitable directions as deemed necessary. Interlocutory relief may also be attainable to safeguard both the Company’s and the Petitioner’s interests until the petition is heard. However, the court will not grant relief assuming unfair prejudice will be established during the trial.

Respondents to Unfair Prejudice Petitions

Typically, the respondent to a petition is the majority shareholder accused of oppressing the minority shareholder. However, the scope of potential respondents is wider. A past member of the company could also be a respondent. Furthermore, it’s possible to seek relief against an individual who isn’t or has never been a member or director of the company in question, provided that individual has knowingly received or aided in the improper diversion of the company’s assets. The company itself is often included as a respondent. This is because there might be instances where the company is obligated to buy assets or shares.

Preliminary Hearings

The initial hearings in an unfair prejudice petition typically involve directives or rulings concerning disclosure and expert valuation evidence. Disclosure is crucial because the majority often controls the physical documents and/or electronic data relevant to the case. Consequently, disputes over what should or shouldn’t be disclosed are common, requiring the court’s guidance on disclosure matters. As previously mentioned, expert valuation evidence plays a pivotal role in assessing the value of the minority’s shares, which is the most frequent remedy in a successful petition. Consequently, the order typically includes provisions for one or more experts to offer valuations of the company and its shares.

Remedies for Unfair Prejudice

The court possesses broad discretion to issue any order it deems fair and equitable to address the unfair prejudice experienced – just as it does when it determines what constitutes “unfair” and “prejudicial” behaviour. This evaluation considers the interests of other shareholders and creditors. The court, however, does not oversee the company’s management moving forward. Nonetheless, certain remedies are commonly employed by the court:

• An order for the majority shareholder(s) to purchase the petitioner’s shares at a fair value and according to terms set by the court.
• An order for directors to transfer property to the company that was obtained in breach of their fiduciary duties.
• An order compelling or prohibiting the company from taking a specific action – this could involve changes to the Articles of Association.
• An order for the minority shareholder to acquire the majority shareholder’s shares.
• An order for the company to be wound up (liquidated).

Limitations on Remedies in Unfair Prejudice Proceedings

Several factors may act as barriers to obtaining relief in unfair prejudice proceedings, which are instances where the court refrains from granting a remedy. Some examples include:

• Refusal of Fair Offer: If the petitioner declines a reasonable offer to purchase their shares.
• Existence of Exit Routes: If there are clear provisions in the company’s Articles of Association or a Shareholder Agreement outlining alternative resolutions for such disputes.
• Petitioner Misconduct: The court typically avoids rectifying situations where both parties have engaged in improper behaviour.
• Delay in Petition: If there’s a significant delay in bringing forth the petition, or if the petitioner has seemingly accepted the unfair treatment without objection.

In a notable change, the Court of Appeal has established that unfair prejudice petitions governed by section 994 of the Companies Act 2006 are subject to a statutory limitation period of 12 years. This decision marks a departure from previous interpretations and will influence the handling of similar claims in the future.

Instructing our Litigation Lawyers

LEXLAW provides the best possible outcome for our clients by conducting in depth investigation and research into the realistic prospects of a case before selecting the appropriate course of action in order to reduce time and expense.

Liability for costs is always an issue in litigation and based on our extensive litigation experience we provide our clients with as much strategic, practical as well as carefully considered legal advice in order to ensure minimum risk in respect of costs.

Where appropriate we encourage the use of alternative dispute resolution (such as mediation and without prejudice negotiation) and our lawyer’s negotiation skills are first class. If early settlement at advantageous terms is not possible, we are extremely experienced and capable at navigating our clients through the litigation process. For personalised guidance and representation in unfair prejudice matters, please reach out to us at [email protected] or give us a call at ☎ 02071830529.