Whether any claim by Max for unfairly prejudicial conduct pursuant to s.994 Companies Act 2006 is likely to be successful.

Issue

CA 2006, s.994 - petition by a member on the ground of unfair prejudicial conduct against himself or other members of the company.

The issue is whether Max’s petition under s.994 is likely to be successful.

Rule

CA 2006, s.994 (1) (a) provides that a member of a company may apply to the court by petition for an order on the ground that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of himself or other members generally.

One of the statutory duties of director is the duty to promote the success of the company for the benefit of its members having consideration to the need to act fairly as between members of the company. Where the directors’ actions are not in compliance with this duty, then the members who have suffered from such unfair prejudice may make a petition under s.994 of the CA 2006.

It is pertinent to note that, CA 2006, s. 260(2)(b) also allows derivative claims in pursuance of an order of the court in proceedings under section 994. Furthermore, s.260(3) provides that a derivative claim may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. As mentioned above, one of the duties of the directors is to act fairly as between members and the non-compliance with that is breach of such duty. Derivative claim petitions however, have been declined by court where the claimant was not asking for anything that could be recovered by an unfair prejudice petition. An example can be seen in Mission Capital plc v Sinclair. 13 Generally, where s.994 will be available to give the claimant all the relief that he could want, the court will refuse petition for derivative action.

CA 2006, s.994 provides that the court may make any order as it thinks fit where a member petitions and shows that the affairs of the company 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.

As the directors are agents of the company, the conduct normally complained of is the conduct of one or more directors. For this reason, one of the orders which the court may make in this connection is an order authorising the petitioner to bring a civil action against the wrongdoers on behalf of the company.

The conduct that is complained against in the potion must be such conduct that relates to the conduct of the affairs of the company. In other words it must relate to the act or omission of the company or those authorised to act as its organs (usually directors).

Shareholders exercising their right to vote is not an act of the company but the resolution that comes from it is an act of the company. 15 In Re Unisoft Group Ltd (No 3), 16 the court held that the distinction between the act of company and act of individual shareholder must be clearly understood in such cases because s.994 will only provide a remedy for the former and not for the latter. 17 In Arrow Nominees Inc v Blackedge 18 the court of appeal refused to provide relief under s.994 because the act complained of related to the majority shareholders acting in the capacity of lenders to the company and not the act of the company in itself.

At the same time, the court does apply some liberality in construing ‘affairs of the company’. Thus in Oak Investment Partners XII v Broughtwood, 19 the Court of Appeal held that it is possible that the director or shareholder who acts in the carrying out of the company affairs, would attract relief under s.994.

In Re CityBranch Group Ltd, Gross v Rackind 21 the Court of Appeal held that in certain cases, the conduct of a holding company towards a subsidiary company may also be a subject of a complaint by a shareholder in a subsidiary company.

The conduct complained of must be unfairly prejudicial to the interest of the member or members. What is unfair prejudice must be liberally construed. 22 Whether such conduct has been unfairly prejudicial is not a subjective matter but an objective one as was held in Re Saul D Harrison & Sons plc. 23 The nature of prejudice must be such that it causes harm to the relevant interest of the member. Not consulting a shareholder in important matters can also be prejudicial.

In Re McCarthy Surfacing Ltd, Hequet v McCarthy, 24 a bonus agreement deliberately designed only to benefit the directors and majority shareholders was held to be unfairly prejudicial.

Application

In this case, Max has not been denied a right to vote during meetings of the company. On the contrary he has been unable to attend a number of meetings. Shareholders are not to be forced to vote in a particular manner. Therefore, Jacob and Ellie are well within their rights to vote in a particular manner, even if it is contrary to Max’s vote as long as their decisions are not unfairly prejudicial to Max’s interest.

The only area of prejudice that is apparent is that Jacob and Ellie have taken higher salaries and refused to increase Max’s remuneration. As has salary as a director does not impact his right as shareholder (to dividends for example), this would not come within the umbrella of s.994.

Ellie and Jacob’s decision to call for an insolvency expert for Finance would be unfairly prejudicial, had the company been making profits or had been solvent at this time. Because, Finance has not made profits for 3 years and has now become insolvent, Ellie and Jacob’s decision to start insolvency proceedings against the wishes of Max cannot be said to be unfairly prejudicial under s.994.

Conclusion

Max’s petition under s.994 has little chance of success. Ellie and Jacob’s conduct is not unfairly prejudicial to Max.