A practical guide to unfair prejudice petitions and how to use them

This guide examines the key principles underpinning unfair prejudice petitions in English law. This can be a complex area and is very fact dependent and as the recent case of Loveridge v Loveridge demonstrates, the court will first and foremost have regard to the constitutional arrangements of the business in question (whether it is a company or a partnership), e.g. Articles of Association, any shareholders agreement, when determining the rights of parties to a business dispute.

What is unfair prejudice?

Frequently shareholders of a company are subjected to unfair prejudice caused by the conduct of the directors or other shareholders of the company. The unfair prejudice jurisdiction has traditionally been invoked by minority shareholders to protect their interests but it can have much wider application. The key policy behind unfair prejudice petitions is that the court will be slow to interfere with the commercial decisions and judgments in respect of the operation of the business.

A recent case, Loveridge v Loveridge [1] concerned a number of successful caravan parks run by Mrs and Mr Loveridge (Ivy and Alldey) and their children, including their eldest son Michael. These caravan sites were run through discrete companies and partnerships. The relationship between Michael and his parents soured, and Michael sought to remove his parents from the various businesses in which he was interested, asserting that his parents were excluding him from the management of the companies. He petitioned under the Companies Act 2006 s.994 alleging unfairly prejudicial conduct. Alternatively, he sought to have the companies wound up pursuant to the Insolvency Act 1986 Pt IV s.122(1)(g) on the basis that it was just and equitable to do so.

Subsequently, the Court of Appeal concluded that the s.994 petition disclosed no arguable case (Loveridge v Loveridge [2020] EWCA Civ 1104, [2022] 2 B.C.L.C. 314, [2020] 8 WLUK 179). However, a judge rejected a subsequent application by Ivy and Alldey to strike it out. Instead, he permitted Michael to amend it and granted an interim injunction preventing his parents from demanding repayment of certain inter-company loans pending trial. In the joined proceedings brought by Michael to wind up the partnerships, the judge made no order for costs following his withdrawal of an application to commit his mother to prison. The appellants appealed against all of those decisions.

The court concluded that the judge should have struck out the petition brought under the Companies Act 2006 s.994 instead of permitting it to be amended. This decision is important as the court reviewed the approach to be adopted when determining whether an arguable case was disclosed by petitions brought in respect of several companies which were regarded as being part of the same overall business.

What is the unfair prejudice jurisdiction?

The unfair prejudice jurisdiction is laid out in sections 994 (members) and 995 (Secretary of State) of the Companies Act 2006. Section 994 provides that a member of a company may petition for relief where a) the affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members generally, or some part of its members, in their capacity as such (including at least that member); or b) an actual or proposed act or omission of the company is or would be so prejudicial.

Who can bring an Unfair Prejudicial petition?

Unfair prejudice petitions may be presented by:

1. Members of a company (section 994(1), CA 2006).
2. Non-members to whom shares in a company have been transferred by the execution and delivery of a proper instrument of transfer (section 994(2)).
3. Non-members to whom shares in a company have been transmitted by operation of law (for example, a trustee in bankruptcy of a bankrupt member or personal representative of a deceased member) (section 994(2)).

What companies do sections 994 and 995 apply to?

A petition under sections 994 and 995 of the CA 2006 may be presented in respect of all companies falling within the definition in the CA 2006. Case law has confirmed that a petition can also be brought in respect of quasi-partnerships.

What is the test for unfair prejudice?

The test as to what amounts to unfair prejudice is an objective test, not a subjective one and applies established equitable principles. It is not necessary for the petitioning shareholder to show that anyone acted in bad faith or with the intention of causing prejudice. The courts will regard the prejudice as unfair if a hypothetical reasonable bystander would have regarded it to be unfair.

Several factors will be taken into account:

1. The unfairly prejudicial conduct must be in respect of the company’s affairs. Example conduct includes management decisions even where they do not involve the board of directors, as well as attempts by shareholders to exert greater control where this results in the disruption of management and detriment to the proper running of the company.
2. The unfairly prejudicial conduct must relate to members’ interests as members. This requirement will not be narrowly or technically construed, especially where quasi-partnerships features are present.
3. A petition may be presented on the basis of a single act or omission and in respect of potential conduct.
4. Both prejudice and unfairness must be shown for relief to be granted but there is no need to show discrimination as well as unfair prejudice. It will prove fatal for a petition if the petitioner is no worse off as a result of the conduct complained of.

Fairness is judged in the context of a commercial relationship, the contractual terms of which are set out in the Articles of Association of the company and in any shareholders agreement (and any subsequent amendments).

The starting point is therefore to ask whether the conduct of which the shareholder complains is in accordance with the articles and the powers which the shareholders have entrusted to the board. Even if the conduct is not in accordance with the articles, it does not necessarily render the conduct unfair, as trivial or technical infringements of the articles may not give rise to a remedy under s.994.

Legitimate Expectations

A member’s interest can also extend to legitimate expectations arising from the nature of the company and agreements and understandings between the parties. Apart from in the case of “quasi-partnerships”, where members may have expectations of participating in the management and profits of the company, it is more difficult to establish legitimate expectations beyond the member’s strict legal rights. If such expectations exist, a petitioner must in general show some abuse by the directors of their powers, or an infringement of the member’s strict legal rights under the company’s constitution or the company’s legislation.

What is considered unfairly prejudicial conduct?

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;[2] or the misuse or misappropriation of company assets.[3]
• 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.[4]
• 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.[5]
• 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.[6]
• 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 available?

Section 996 of the Companies Act 2006(2) lists particular types of orders which may be made by the court if it decides that there has been unfair prejudice, although the court retains a general discretion under Section 996(1) to make any order it thinks fit. The powers listed in 996(2) provide that the court can:

• regulate the conduct of the company’s affairs in the future;
• require the company to refrain from doing or continuing an act complained of, or to do an act which the petitioner has complained that it has omitted to do;
• authorise civil proceedings to be brought in the name and on behalf of the company by such person/s and on such terms as the court may direct;
• require the company not to make any, or any specified, alterations in its articles without the leave of the court; and
• 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 the purchase by the company itself, the reduction of the company’s capital accordingly.

From a costs point of view, the power to authorise civil proceedings subject to terms directed by the court can be a particularly useful remedy, as it enables an action to be pursued by the company, as the costs burden is shifted to the company rather than the petitioner.

However, in practice, the most common remedy awarded to a successful Petitioner is to order that their shares be purchased by those who caused the unfair prejudice.

How to bring an unfair prejudice petition?

• Court proceedings for unfair prejudice begin by way of a petition.
• The petition must specify the grounds on which it is presented and the nature of the relief which is sought by the petitioner (i.e. the shareholder who is bringing the claim).
• The court will fix a hearing date on which the petitioner and any respondent must attend at court or directions to be given as to the procedure in respect of the petition.
• Interlocutory relief may be available to protect the company’s and the petitioner’s position pending the hearing of the petition

Respondents to the petition

• The shareholders or directors who it is alleged have been guilty of unfair conduct should be named as respondents to the petition, together with all members of the company whose interests have been affected by the alleged misconduct or who would be affected by a court order.
• A third party who is not a member of the company should also be joined if it might be affected by the remedy sought, or was directly involved in the allegedly unfairly prejudicial conduct.
• Finally, the company itself is normally named as a respondent, although it is to some extent a nominal respondent.

It is important to bear in mind that communications between the company and its lawyers may not be privileged from production in s.994 proceedings.

Are there alternative remedies available?

Yes, there are other shareholder remedies that should also be considered and may, depending on the circumstances, either be more suited to a shareholder’s circumstances than an unfair prejudice petition, which can be complex, or may put forward as additional arguments or claims together with a s.994 Petition including “just and equitable winding-up” under s.122(1)(g) of the insolvency act 1986 and a derivative action under sections 260-264 of Companies Act 2006.

To conclude

As the Loveridge judgment demonstrates, it is critical to assess each case on its own facts and to look at the nature and set up of the company or group of companies in question. Michael’s petition invited the court to treat all of the companies and partnerships as a composite group. It failed to give appropriate consideration to the separate positions of each of the five companies and both judges commented on the need to respect the forms chosen by the parties to conduct their affairs. Even if there has been a single business, it does not override the need to consider the position of each company in respect of a petition being brought. What is clear is that petitions must be carefully crafted and with reasoned arguments for the unfair prejudice caused by the conduct, act or omission in question. The petitioner must normally prove an actual breach of terms that have been agreed as to how the company will be run, or show that such terms were being used in a way which offends equitable considerations.

If you are involved in a shareholder dispute or advising a client on the process, do contact Richard Gore

[1] [2021] EWCA Civ 1697

[2] Re Edwardian Group Ltd [2018] EWHC 1715 (Ch) at paragraphs 338-339 and 345), especially in the context of a quasi-partnership type company (Re Baumler (UK) Ltd [2004] EWHC 1763 (Ch))

[3] Re Woven Rugs Ltd [2010] EWHC 230 (Ch)

[4] Re Macro (Ipswich) Ltd [1994] 2 BCLC 354 at paragraphs 404-406.

[5] Re Gate of India (Tynemouth) Ltd [2008] EWHC 959 (Ch) at paragraphs 107-108

[6] Re Halt Garage [1982] 3 All ER 1016