10 - Members' Remedies Flashcards
If a third party causes loss to both the company and its members, can both sue to recover their loss?
A third party causes loss to both the company and its members. In such a case, the general rule is that both the company and its members have a personal right to sue the wrongdoer (PENDER v LUSHINGTON (1877)).
What is the no-reflective loss principle?
The no-reflective loss principle basically states that where the members’ losses are reflective of the loss sustained by the company, then it is the company that should recover the loss and the member will not be able to claim. An obvious example of such a situation is where a person causes loss to the company, which in turn causes the company’s share price to drop. Both the company and its shareholders have suffered a loss, but the loss suffered by the shareholders is merely reflective of that suffered by the company.
In what situation will the no-reflective loss principle not apply?
The no-reflective loss principle will not apply where the actions of a person have caused a member loss and that loss is reflective of that of the company, but the company is unable to claim due to the loss it has sustained (GILES v RHIND (2002)).
What is the difference between a representative action and a group litigation order?
Where more than one person has the same interest in a claim, then a representative action may be commenced by one or more of the persons who have that interest. Under a representative action, all the affected members will obtain the same remedy. If differing members wish to obtain differing remedies, then a group litigation order will be preferable.
What two principles form the rule in FOSS v HARBOTTLE?
- The ‘proper claimant principle’, which provides that if a wrong is committed against a company, then only the company can sue for redress and its members cannot sue on the company’s behalf; and
- The ‘irregularity principle’, which provides that a member cannot bring a claim in relation to an irregularity that could be remedied or ratified by a simple majority of the members.
In what situations could a common law derivative action be brought?
In EDWARDS v HALLIWELL (1950), Jenkins LJ stated that there were four instances where a derivative action could be brought, namely:
- Where the act complained of was illegal or ultra fires;
- Where the act complained of infringed the personal rights of a member;
- Where the act complained of could only be done or sanctioned by the passing of a special resolution; and
- Where the act complained of constituted a ‘fraud on the minority’.
What is a derivative claim and what causes of action can form the basis of a derivative claim?
A derivative claim is 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 (CA2006, s. 160(1)). A derivative claim can only derive from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.
Briefly explain the process used by the court to determine whether a derivative claim should be permitted to continue.
The court uses a two-stage procedure in order to determine if a derivative claim should be given permission to continue.
- In stage 1, the court will determine if, based on the evidence provided, there is a prima facie case for granting permission to continue the claim (s. 261(2)).
- In stage 2, the court will decide whether permission to continue should actually be granted. Section 263(2) sets out certain circumstances in which permission must be refused. Section 263(3) and (4) sets out factors that must be taken into account by the court when deciding whether to grant permission for the claim to continue.
A s. 994 petition can be made by which parties?
Section 994(1) provides that a petition may be made by ‘a member of a company’, so any person who is a member within s. 112 may petition the court. In two situations, non-members may also petition the court:
- a person who is not a member may petition the court if shares have been transferred or transmitted to them by the operation of law (s. 994(2)).
- the Secretary of State may bring a petition in certain circumstances (s. 995), although such petitions are extremely rare (see e.g. SCITEC GROUP LTD (2012)).
A s. 994 petition can be brought against which parties?
This will depend on whether s. 994(1)(a) or (b) is applicable:
- Section 994(1)(a) does not identify who conduct must be unfairly prejudicial, and so a claim can be based on the actions of a wide variety of persons, including the company, the directors, other members or third parties.
- As Section 994(1)(b) refers to an actual or proposed omission of the company, the courts have held that ‘the petitioner must identify something which the company does or fails to do’ (GRAHAM v EVERY (2014)).
Provide eight examples of conduct that has been held to amount to unfairly prejudicial conduct.
- Abuse of a controlling position can amount to unfair prejudice, with examples including the directors (i) selling company assets at an undervalue to another company they control (LITTLE OLYMPIAN EACH WAYS LTD (NO 3) (1995)); (ii) transferring business to another company they control (LONDON SCHOOL OF ELECTRONICS LTD (1986)); or (iii) paying themselves excessive remuneration (CUMANA LTD (1986)).
- Serious mismanagement of a company (MACRO (IPSWICH) LTD (1994)).
- A breach of directors’ duties (CUMANA LTD (1986)).
- A breach of the company’s constitution, or statutory rights (a Company (No 00789 of 1987) (1990)).
- Criminal conduct (BERMUDA CABLEVISION LTD v COLICA TRUST CO LTD (1998)).
- Exclusion from management of a quasi-partnership company (GHYLL BECK DRIVING RANGE LTD (1993)).
- A failure to consider paying dividends (MCCARTHY SURFACING LTD (2008)), the payment of derisory dividends (SAM WELLER AND SONS LTD (1990)), or refusing to pay a declared dividend (GRACE v BIAGIOLI (2005)).
Give five examples of the types of remedy that the court can order under s. 996.
Although the court can make any order that it thinks fit, s. 996(2) provides a non-exhaustive list of remedies that the court can award, including:
- an order regulating the conduct of the company’s affairs in the future (e.g. where the defendant is a director, the court may strip that director of certain powers);
- an order requiring the company to refrain from doing an act complained of, or to perform an act that it has failed to perform;
- an order authorising civil proceedings to be brought in the name and on behalf of the company by such persons and on such terms as the court may direct;
- an order requiring the company not to make any, or any specified, alterations in its articles without the leave of the court;
- an order providing 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 a purchase by the company itself, a reduction of the company’s capital accordingly.
When determining the value of shares, when will the court discount the price of the shares?
The court will normally apply a discount where the claimant is a minority shareholder in order to reflect the minority shareholder’s lack of control.
Can the court wind up a company under s. 996?
The issue is not entirely clear. In APEX GLOBAL MANAGEMENT LTD v FI CALL LTD (2015), Hildyard J implied that winding up was available by stating that ‘the court should not ordinarily make a winding-up order pursuant to section 996, given the specific provisions for such a remedy…’ However, the Law Commission has argued that winding up is not available based on the judgement on Ferris J in FULL CUP INTERNATIONAL TRADING LTD (1995).
What is a contributory?
A ‘person liable to contribute to the assets of a company in the event of its being wound up’ (IA 1986, s. 79(1)). An obvious example of a contributory would be shareholders who had not fully paid for their shares.
