Member’s Remedies

Question 1

What is the no reflective loss principle? When does it not apply?

Answer 1

when the members’ losses are reflective of the loss sustained by the company, the company should sue not the members

Giles v Rhind = members’ can bring a claim for losses that are reflective if the company is unable to claim due to that person’s conduct

Question 2

What is a representative action?

What happens if it succeeds?

Answer 2

Where members have the same interest in a claim, a representative action may be commenced by 1 or more members as representatives of any person with that interest

If succeeds = any judgement or court order binds all the parties represented in the claim, unless court orders otherwise

All affected members get the same remedy

Question 3

What is a Group Litigation Order?

Answer 3

GLO = a mechanism to manage multiple cases that arise from common or related issues of fact or law

Affected persons opt into the GLO and are placed on a group register

Bring their claim in an individual capacity but case is heard in a single court

If succeeds = any judgment or court order binds all the parties on the group register, unless court orders otherwise

Not all affected members get the same remedy

Question 4

Describe the case of Foss v Harbottle and the 2 principles it established.

Answer 4

Foss and Turton were minority shareholder and alleged the directors and certain other shareholders defrauded the company by entering fraudulent transactions
Commenced proceedings on behalf of themselves and the other members, except those who committed the injuries complained of
Claim failed

2 principles:
1. Proper claimant principle = if wrong is done to company, only company can sue for redress
Company is proper claimant and members can’t sue on behalf of the company
2. Irregularity principle = a member cannot bring a claim for an irregularity that could be remedied or ratified by a simple majority of the members

Question 5

What is the exception tot he Foss v Harbottle rule and the 4 instances it can be brought?

Answer 5

The derivative action

4 instances it can brought = where the act complained of:

1. Was illegal or ultra vires
2. Infringed the personal rights of a member
3. Could only be done by the passing of a special resolution
4. Constituted a fraud on the minority

Still applies where (i) a multiple derivative action is involved and (ii) claim relates to a foreign company not registered under a CA

Question 6

What is the statutory derivative claim? What 4 instances can it not be brought? When can it only derive?

Answer 6

S.260 CA2006 = a claim brought by a member for a course of action vested in the company, which seeks relief on behalf of the company

Can not be brought:

1. by a former members
2. for a course of action personally vested in the member
3. where a multiple derivative action is involved
4. where a claimant is a member of a company not registered under a Companies Act

Any benefits go to the company not the member

s.260(3) CA2006 = derivative claim can only derive from an act or omission involving negligence, default, breach of duty or breach of trust by a director

Question 7

What is the derivative claim procedure?

Answer 7

1. Claimant applies to court for permission to make a claim
2. Courts will establish if there is a prima facie case (must be to continue)
3. Courts will determine whether to grant permission:
   a. The Mandatory Test = s.263 CA2006 = 3 circumstances to deny permission:
   i. If a person acting in accordance with s.172 (duty to promote company success) would not seek to continue the claim.
   ii. If cause of action arises from an act or omission yet to occur, and has been authorised by the company
   iii. If cause of action arises from an act or omission already occurred, and was authorised before or ratified since
   b. The Discretionary Test = s.263 CA2006 = 6 factors courts must consider:
   i. Is member acting in good faith by seeking to continue the claim
   ii. The importance a person acting in accordance with s.172 would attach to the claim
   iii. If act/omission yet to occur = the liklihood of authorisation or ratification
   iv. If already occurred = the likelihood of ratification
   v. Why the company has decided to not to pursue the claim. If valid reasons, permission denied, unless claim is against the majority of the board
   vi. Could the member pursue in their own right rather than on behalf of the company?
4. If permission denied claim is dismissed
5. If permission is granted, claim continues

Question 8

What does s.994 say about the unfair prejudice petition?

Answer 8

S.994(1) CA2006 = a member may petition to the court for a remedy where:

(a) The company’s affairs are / have been conducted in an unfairly prejudicial manner to the interests of members generally, or some part of its members
(b) An actual or proposed act or omission of the company is or would be so prejudicial

Question 9

Who can petition for a s.994 unfair prejudice remedy? (3) Who can be a respondent? (4)

Answer 9

Petitions:
Any person who is a member under s.112 CA2006
Those that have shares transferred/transmitted to them by operation of law
The Secretary of State
Former members cannot

Respondents:
A claim under s.994(1)(a) = can be brought against the company, the directors, other members, or third parties who have ‘improperly assisted’ the alleged unfairly prejudicial conduct

A claim under s.994(1)(b) = petitioner must identify something which the company does or fails to do

Question 10

When is conduct unfair? When is conduct prejudicial?

Answer 10

Unfair = objective = conduct unfair if a hypothetical reasonable bystander would regard it as having unfairly prejudiced the petitioner’s interests

Prejudicial = must show conduct has done harm to the members in a commercial sense

Question 11

What are 6 examples of unfairly prejudicial conduct?

Answer 11

1. Abuse of a controlling position e.g. directors pay themselves excessive remuneration
2. Serious mismanagement of the company
3. A breach of directors’ duties
4. A breach of company’s constitution or statutory rights
5. Criminal conduct
6. Exclusion from management of a quasi-partnership company (Re Ghyll Beck Driving Range Ltd [1993])

Question 12

What are the interests of members under the unfair prejudice petition?
How must member act?
What are equitable considerations

Answer 12

Members’ interests are wider than members’ rights

Members must act member qua member = must bring claim in capacity as a member, and not in any other capacity

Equitable considerations often involve ‘a fundamental understanding between the shareholders forming the basis of their association but was not put into contractual form’
The breach of such an understanding = can amount to unfairly prejudicial conduct (O’Neill v Phillips [1999])
Only likely arise in quasi-partnership companies

Question 13

What are the remedies of the unfairly prejudice petition? (6)

Answer 13

S.996 CA2006 = court may make such order as it thinks fit for giving relief
‘May’ = not obliged to provide any remedy
The petitioner must specify the remedy that he seeks, court is not bound to provide this remedy
Court can deny a remedy where a substantial period has elapsed between the unfairly prejudicial conduct and the petition being brought

s. 996 CA2006 = non-exhaustive list of remedies, court can award an order:
1. Regulating the conduct of the company’s affairs
2. Requiring company to stop act complained of, or start act failed to perform
3. Authorise civil proceedings be brought in the company’s name and on behalf of the company
4. Restraining company from altering articles without leave of court
5. Share purchase of any member by other members or the company itself

Question 14

What is a share purchase order?
What is the usual approach for determining shares?
What date will be used?

Answer 14

Court orders the respondent or company to buy the shares of the petitioner or respondent must sell his shares to the petitioner

Usual approach for determining price of shares = shares valued on a pro-rata basis and no discount will be applied
Where the petitioner is a minority shareholder = a discount will be applied
Where the petitioner is a member of a quasi-partnership = usual approach adopted

Usual approach for determining the date to value shares = prima facie, the date the purchase order is made
If respondent’s conduct caused value of shares to decrease = a date before the conduct took place

Question 15

Is winding up a remedy for an unfair prejudice petition?

Answer 15

Apex Global Management Ltd v FI Call Ltd [2015] = this case implied winding up was available

The Law Commission has argued that winding up is not available

Clarification needed

Question 16

What does s.122 IA1986 say about the winding up petition?

Answer 16

= a member and other specified persons can petition the court for an order winding up the company

Court may wind up if it is just and equitable to do so

Question 17

Who can apply for a winding up petition under s.124 ia1986? (1)

Answer 17

S.124 IA1986 = winding up petition can be made by a contributory or contributories

Contributory = a person liable to contribute to the assets of a company in the event of its being wound up e.g. shareholder who has not fully paid for his shares

Shareholders with fully paid up shares can apply if can show they have a tangible interest:

1. Prima facie probability that there will be assets available for distribution amongst the shareholders
2. Winding up would achieve some advantage, or avoid / minimise some disadvantage, to him by virtue of his membership

Question 18

When will it be just and equitable to wind up a company? What are 6 examples of conduct resulting to winding up on just and equitable grounds?

Answer 18

Just and equitable is a question of fact, and each case must depend upon its own circumstances

Examples of conduct resulting to winding up on just and equitable grounds = if a company:

1. Is formed for a particular purpose stated in its objects clause and it becomes impossible to fulfil this purpose
2. Becomes deadlocked (directors refuse to talk to each other)
3. Is set up for an unlawful purpose
4. Is set up for a fraudulent purpose
5. Has justifiable lack of confidence in the management of the company’s affairs
6. Re Davis and Collett Ltd [1935] = the exclusion of a member from management in a quasi-partnership

Question 19

What is a quasi-partnership?

Answer 19

When company is a quasi-partnership, court will take into account equitable considerations

Ebrahimi v Westbourne Galleries Ltd [1973] = 3 characteristics of a quasi-partnership: (need at least 1)

1. An association formed or continued on the basis of a personal relationship involving mutual confidence
   e. g. partnership converts into a limited company
2. An agreement / understanding that all / some shareholders will participate in the business conduct
3. A restriction upon the transfer of the members’ interest in the company

Question 20

When can the court not make a winding up order?

What is the relationship between the winding up petition and the unfair prejudice petition?

Answer 20

S.125 IA1986 = court must not make a winding up order if:

1. Some other remedy is available to the petitioner; and
2. The petitioner is acting unreasonably in seeking to have the company wound up

Practice Direction = a winding up petition should only accompany an unfair prejudice petition if winding up is the petitioner’s preferred remedy or it is considered the only relief he is entitled to