10 - Members' remedies

Question 1

What are the 3 principal statutory member remedies?

Answer 1

• Derivative claim
• Unfair prejudice petition
• Winding up petition

Question 2

Who can typically sue a wrongdoer when wrongdoer causes loss to company and its members?

Answer 2

Both the company and its members

Question 3

Exception to general rule that both company and its members can sue wrongdoers

Answer 3

‘Reflective loss’ principle

Question 4

What is ‘reflective loss’ principle?

Answer 4

Prevents members from suing the wrongdoer if the members loss is viewed as being merely the reflective loss of the company, which the company can recover itself

Question 5

Two mechanisms allowing for collective action of multiple members

Answer 5

• Representative action
• Group litigation order

Question 6

Representative actions explained

Answer 6

A member who has suffered a loss can, on his own or with other affected members, bring a claim along with or on behalf of the affected members.
Any judgement or order made by the court binds all the parties.

Question 7

Group Litigation Orders explained

Answer 7

Similar to representative action, but allows for some members to obtain different remedies from others.
Effectively allows for multiple cases arising from common or related issues to be managed at the same time, avoiding multiple hearings.

Question 8

What is a derivative action claim?

Answer 8

A claim brought by a member of a company in respect of a cause of action vested in the company, which seeks relief on behalf of the company

Question 9

What must a claimant member do before derivative action claim can continue?

Answer 9

Apply to court for permission

Question 10

What is the aim of ‘stage 1’ in determining whether derivative action claim may continue? - establishing ‘prima facie’ case

Answer 10

To filter out frivolous or unmeritorious claims

Question 11

What do courts consider in determining whether to grant permission to a derivative action claim, if discretion is required (none of ‘three circumstances’ apply)? - ‘stage 2’ (6)

Answer 11

• The views of other ‘independent’ shareholders
• Whether the member is acting in good faith
• The importance a director promoting company success would attach to the claim
• Whether the conduct would likely be authorised/ratified
• Whether the company has decided not to pursue the claim
• Whether the applicant should pursue a remedy in their own right rather than on behalf of the company

Question 12

2 stages following application to make derivative action claim

Answer 12

• Stage 1 - establishing a prima facie case
• Stage 2 - determining whether to grant permission

Question 13

What is the ‘proper claimant’ principle? & significance

Answer 13

The principle that the party that suffered the loss is the party entitled to sue to obtain redress.
Members usually cannot sue on behalf of company.

Question 14

Principle rationale behind proper claimant principle

Answer 14

Prevent excessive claims being brought - majority of members must agree to bring litigation, one litigation-loving minority member cannot do so alone

Question 15

What is the irregularity principle?

Answer 15

A member cannot bring a claim in relation to an irregularity that could be remedied or ratified by a simple majority of the members

Question 16

Key reason why possibility for derivative action is important

Answer 16

In instances where directors are wrongdoers, and they are also majority shareholders
Act constitutes a ‘fraud on the minority’

Question 17

Which actions provide grounds for a derivative claim?

Answer 17

An actual or proposed act or omission involving negligence, default, breach of duty or breach of trust

Question 18

‘Three circumstances’ which prevent derivate action from continuing if they apply?

Answer 18

1 - Person acting in accordance with S.172 would not make claim
2 - Act or omission yet to occur has been authorised or ratified by the company
3 - Act or omission has occurred and has been authorised or ratified by the company

Question 19

What must be demonstrated for a successful claim of unfair prejudice?

Answer 19

The conduct of the company was unfair, and the conduct caused or is causing prejudice or harm to the interest or rights of some or all members

Question 20

When is conduct considered unfair?

Answer 20

There need not be any bad faith or intention. Courts consider unfair if hypothetical reasonable bystander would consider it so

Question 21

When are members rights considered prejudiced - conduct is considered prejudicial?

Answer 21

Must be shown that conduct has done the members harm, usually in a commercial (generally financial) sense

Question 22

Where in CA.2006 can remedies available for successful claims of unfair prejudice be found?

Answer 22

S.996

Question 23

Who may pursue unfair prejudice remedy?

Answer 23

• Members
• Non-member if shares have been transferred or transmitted to them by operation of law
• Sec of State in certain circumstances

Question 24

3 examples of conduct that have been held to amount to unfairly prejudicial conduct

Answer 24

• Breach of directors’ duties
• Breach of company’s constitution or statutory rights
• Abuse of controlling position such as paying themselves excessive remuneration

Question 25

If a share purchase order is made by court, when will price of shares be discounted?

Answer 25

If the shares don’t grant any control of the company

Question 26

When will court grant order for members’ winding up?

Answer 26

If it is ‘of the opinion that it is just and equitable that the company should be wound up’

Question 27

Understanding of ‘just and equitable’ in court decision to grant members’ winding up

Answer 27

Jurisdiction of court is not limited, each case depends upon its own circumstances - ie. broad definition and up to courts to decide

Question 28

It is well accepted that in what circumstance, a members’ winding up of a quasi-partnership will be justified?

Answer 28

If one member is excluded from management

Question 29

Relationship of remedy that is members’ winding up with other remedies explained

Answer 29

As winding up is a drastic measure, it will not be ordered unless some other remedy is available

Question 30

Can a winding up petition be brought with an unfair prejudice petition in relation to the same conduct?

Answer 30

Yes - but as it places significant pressure on the company, it is usually not allowed

Question 31

3 characteristics of quasi-partnership

Answer 31

• association formed or continued based on personal relationship/mutual confidence, often found following conversion from pre-existing partnership to company
• agreement or understanding that shareholders shall participate in conduct of the business
• restriction upon transfer of members’ interest in the company (members stake cannot be taken out if excluded from management)