Unfair Prejudice

On previous pages I referred to s994 Companies Act 2006.

It's worth looking at in detail:

A member of a company may apply to the court by petition for an order under this Part 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 members generally or of some part of its members (including at least himself), or .
  • that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

The act provides that those who acquire shares through operation of law (e.g. on death) have the same rights as a member.

In practical terms such claims are brought against those who control the company - the majority shareholder(s)/directors - so the remedy is often said to prevent "fraud on a minority” although it extends far more broadly than fraud would suggest.

Interestingly the test is objective: the Court need not find bad faith or conscious intention on the part of the controllers to treat the claimant badly, but both elements of the test must be made out i.e. there must be both unfair and prejudicial behaviour. The Court's starting point will be to look at the contractual terms i.e. the articles of association, and the powers entrusted to the board, to consider what could have and should have been done.

"Unfair” is a broad brush term, allowing the Court to look at the wider interests of the parties and the rights and obligations adopted and expected by the members (i.e. shareholders). It is in this context that quasi partnership issues arise (see previous).

In the absence of a quasi partnership the Claimant must show some abuse by directors of their powers, or an infringement of their strict legal rights under the company's constitution or the law.

As you would expect, in an article of this length, there cannot be a definitive  statement of the law, and this article does not offer specific legal advice.

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