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Unfair Prejudice & Just And Equitable Winding Up Notes

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Unfair Prejudice &
Equitable Winding Up

Just

and

Contents
G&D Chapter 20: Unfair Prejudice....................................................................................................... 192
Introduction............................................................................................................................................. 192
Scope of the provisions........................................................................................................................ 193
Independent Illegality and Legitimate Expectations or Equitable Considerations....194
Informal arrangements among the members.......................................................................194
Balance between dividends and directors' pay....................................................................195
Other categories of unfair prejudice......................................................................................... 196
Prejudice and Unfairness.................................................................................................................... 196
Unfairness Prejudices and the Derivative Action.....................................................................197
Reducing Litigation Costs................................................................................................................... 198
Remedies................................................................................................................................................... 198
Winding up on Just and Equitable Grounds................................................................................199
Conclusion................................................................................................................................................ 200
Unfair prejudice remedy (S994 petition)......................................................................................... 200
Can be against a third party............................................................................................................... 200
Re Little Olympian (No 3) [1995] 1 BCLC 636......................................................................200
Must concern the company's affairs............................................................................................... 200
Re Unisoft (No 3) [1994] 4 BCC 596.......................................................................................... 200
The petitioner must show unfair prejudice in the capacity as a member......................201
Re JE Cade and Sons [1992] BCLC 213..................................................................................... 201
Re A Company [1988] 4 BCC 506............................................................................................... 201
Gamlestaden Fastigheter v Baltic Partners Ltd & Others [2007] 4 All ER 164........201
What amounts to unfairly prejudicial conduct?........................................................................202
O'Neill v Phillips [1999] 1 WLR 1092....................................................................................... 202
Re Tobian Properties [2012] EWCA Civ 998.........................................................................203
Re Coroin Ltd [2012] EWHC 2343............................................................................................. 203
If justified, prejudicial conduct may not be unfair...................................................................204
Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273........................................................204
Grace v Biagoli [2006] BCC 85..................................................................................................... 204
Re London School of Electronics [1986] Ch 211..................................................................204 Unlawful conduct can amount to unfair prejudice...................................................................204
Re Macro (Ipswich) [1994] 2 BCLC 354.................................................................................. 204
Re Baumler Ltd [2005] 1 BCLC 92............................................................................................. 205
Clark v Cutland [2003] 2 BCLC 393........................................................................................... 205
Re DR Chemicals Ltd [1989] 5 BCC 39..................................................................................... 205
Re Citco Banking [2007] UKPC 13.............................................................................................. 205
Equitable considerations may affect a finding of unfair prejudice....................................206
Who this applies to........................................................................................................................... 206
Contractual frustration................................................................................................................... 206
Failure to pay a dividend............................................................................................................... 206
Exclusion from Management........................................................................................................ 207
Inequitable issuance of shares..................................................................................................... 207
Ability to contract out of S994..................................................................................................... 207
Remedies: S996........................................................................................................................................... 208
Order a buy-out (most common remedy).................................................................................... 208
London School of Electronics....................................................................................................... 208
McCarthy Surfacing.......................................................................................................................... 208
Croly v Good [2010] 2 BCLC 569................................................................................................ 208
Scottish CWS v Meyer [1959] AC 324....................................................................................... 208
Profinance Trust SA v Gladstone [2002] 1 BCLC 141.........................................................209
Annacott Holdings Ltd [2012] EWCA Civ 998.......................................................................209
Orr v DS Orr & Sons (Holdings) Ltd [2013] CSOH 116......................................................209
Authorise a derivative action............................................................................................................ 210
S996(2)(c) Powers of the court under this Part...................................................................210
When can the court use a corporate remedy?............................................................................ 210
Re Charnley Davies [1990] BCLC 760....................................................................................... 210
Bhullar v Bhullar............................................................................................................................... 210
Nina Kung v Tan Man Kou [2004] HKFCA 73, sub nom Re Chime Corp.....................210
Hannigan, Drawing Boundaries between Derivative Claims and Unfairly Prejudicial
Conduct [2009] JBL 606...................................................................................................................... 210
Introduction........................................................................................................................................ 210
Corporate wrongs - the orthodox view................................................................................... 211
Conclusion............................................................................................................................................ 212
Just and Equitable Winding Up............................................................................................................. 212
S122(1)(g) Insolvency Act 1986...................................................................................................... 212
Re Guidezone Ltd [200] BCLC 321 at [168] to [180]...............................................................212 Ebrahimi v Westbourne Galleries [2009] EWCA Civ 261......................................................212
Hawkes v Cuddy (supra)..................................................................................................................... 213
Questions....................................................................................................................................................... 213

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 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 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 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 quasipartnerships, 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 easily rebutted as what the court is doing is simply trying to enforce the understanding reached by the parties themselves on how remuneration is to be calculated. In small companies with less documentation, deciding what this understanding was may require extensive litigation.
Other categories of unfair prejudice
Case law dominated by informal arrangement unfair prejudice claims but the Act is not confined to such cases. However, beyond the informal arrangements category and linked arguments about breach of directors' duties, this is unclear.
Some examples:

Communications with shareholders in a prospective takeover should be done in a way that reflects the Takeover Code rules even though this is not strictly legally binding in this case - Re A Company [1986]
McGuiness v Bremner Plc [1988] - analogy drawn to rules in model articles on how directors should hold meeting requested by members promptly even though the company had adopted an earlier version of the model articles that did not mention this clause
The courts have been unwilling to move beyond these 'unfair by analogy to an agreement which you ought to have had' cases - so there is no general test of
'unfairness' per se even though judges will refrain from striking out cases just because they do not fall within the informal agreement category: Re Sam Weller
Ltd [1990] - about a dividend policy and whether or not it was unfair to certain categories of shareholders. In such a case, it is unlikely that the court will decide for itself what the right dividend policy should be but would probably remit it to the NEDs - Re A Company [1997].

Prejudice and Unfairness
Prejudice is different from unfair prejudice. You can have unfairness without prejudice because no loss. No S994 claim - Guinness Peat Group plc c British Land Co plc [1999].
Issue - what is unfair?
Unfairness is about enforcing informal deals usually - Re A Company [1983] - this case concerned a dividends policy which meant a member who needed money could not get any cash but there was no prior agreement to pay out dividends in any par2014]ticular way so this was prejudicial but not unfair.
There is no clean hands rule but eg bad behaviour by a director may justify his removal despite a prior agreement so this means he was prejudiced but not unfairly - Grace v
Biagioli [2006].
Note - possible to consent to conduct which would otherwise be unfairly prejudicial
(and which even may be some way beneficial) - no claim - Jessner v Jarrad Properties
Ltd [1993]. If C has shown no interest in the company's management whatsoever this may be treated as acquiescence - Re RA Noble & Sons [2014].
Unfairness is an objective test. Can be done without intention of the majority shareholders - Re Saul D Harrison.
So the issue is whether or not the petitioner has suffered in a way in which is entitled to protection. This is not synonymous with a fall in share value. Often, a dispute will arise in relation to being denied a place on the board ie having a say in management.

Unfairness Prejudices and the Derivative Action
It may seem odd that the unfair prejudice claim can be used to complain of breach of directors' duties owed to the company but this is possible - S994 is to protect the interests of minority members which could be unfairly prejudiced as a result of a breach of directors duties owed to the company so there is overlap with the derivative action procedure. The Jenkins Commission (1962) which first proposed the unfair prejudice action envisaged some degree of overlap.
What does that mean when a wrong has been done to the company but the claimant wishes to bring a S994 claim? It would be uncontroversial to award damages for additional damage suffered by member over that suffered by the company. The availability of the derivative action is not a bar to the unfair prejudice claim - Re A
Company [1986].
However, can S994 also be used to award damages to the company? This has now been resolved by the wide discretionary remedies available under S996 - it would be counterproductive to force a second round of litigation.
In contrast, see Re Charnley Davies Ltd (No 2) [1990] per Millett J - essence of wrong complained of in S994 needs to be a wrong to the minority (dicta).

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