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Unfair prejudice petition or derivative claim?

15.12.23

In Ntzegkoutanis v Georgios Kimionis [2023] EWCA Civ 1480 (12 December 2023), the Court of Appeal has provided clear and practical guidance on when to bring an unfair prejudice petition or a derivative claim.

General background

Where a minority shareholder is aggrieved that a director’s unlawful actions have harmed the company he may be able to bring an unfair prejudice petition and/or a derivative action.

Whilst a derivative action has potential advantages (including a costs indemnity from the company), it is often less attractive than an unfair prejudice petition as the former has a filter stage at which the Court’s permission is required to pursue it.

It is also well-established that the court has wide powers of relief on an unfair prejudice petition including the ability to grant relief in favour of the company.

Typically, therefore, where a shareholder also wishes to seek other relief (such as a share buy-out order) it has plumped for an unfair prejudice petition over a derivative action.

One potential stumbling block, however, has been the decision of the Hong Kong Court of Appeal in Re Chime Corp Ltd (2004) 7 HKCFAR 54.   The distinguished bench in Re Chime included the former Law Lord, Lord Scott.

In Chime, it was acknowledged that the Court had jurisdiction to award damages or restitution to the company in an unfair prejudice petition.  The Court stressed, however,  that an unfair prejudice petition was only appropriate where relief was being sought from mismanagement rather than from misconduct.  Members of the Court also suggested that in a case of any complexity an order in favour of the company should only be made in “rare and exceptional circumstances”.

Chime has been cited with approval in subsequent cases in numerous commonwealth jurisdictions, including by Lord Scott himself in a case in the Privy Council.

Ntzegkoutanis v Georgios Kimionis

In Kimionis, the Court of Appeal considered an appeal against the striking out of relief sought in an unfair prejudice petition in favour of the company which was the subject of the petition.

The underlying allegations was that in breach of fiduciary duty the other shareholder, a director of the company, had diverted the company’s business to another company which that director owned.

The petitioner sought not merely an order that the director-shareholder sell his shares to the petitioner.  He also sought orders against that respondent and the transferee company that they account to the subject-company and compensate it in respect of the alleged wrongful conduct.

The respondents had successfully applied at first instance to strike out the relief sought in favour of the subject-company.

The leading judgment was given by Newey LJ (with whom Snowden and Whipple LJJ agreed).  The key principles, at [55], are in summary as follows:

1. The Court has power to grant relief in favour of the company on an unfair prejudice petition.
2. At least generally, in unfair prejudice proceedings the Court should not make an order in favour of the company unless it corresponds with one which the company would have been entitled had the relevant allegation been successfully prosecuted in an action by the company (or in a derivative action in the name of the company).
3. It can be an abuse of process to claim relief in favour of the company by unfair prejudice petition.  A petition claiming only such relief would not be proper; the shareholder should instead seek permission to bring a derivative claim.  A petition could also be struck out as an abuse of process if, although it included a claim for relief which was available only in unfair prejudice proceedings (such as an order for the purchase of shares), the petitioner was not genuinely interested in obtaining such relief and was, instead, trying to bypass the permission requirement on a derivative action.
4. Where, on the other hand, an unfair prejudice petition seeks both relief in favour of the company and relief that would not be available in a pure derivative claim, and the petitioner appears to be genuinely interested in obtaining the latter, it would not ordinarily be appropriate to strike out either the petition or any part of the relief sought.  It may well make sense for a petitioner to include in an unfair prejudice petition a claim for a buy-out order and an order for a payment to be made to the company on the basis of a breach of duty by a respondent.  Even if, on particular facts, it made more sense for the order in favour of the company to be pursued in a distinct derivative claim, the petition or any relief sought would rarely be abusive if all the heads of relief were being pursued otherwise than to evade the permission requirements.  The same acts can be both mismanagement which is unfairly prejudicial to a minority shareholder and misconduct in breach of a director’s duties causing harm to the company.  If a petitioner considers, for example, that such facts could warrant a share purchase order or, failing that, at least the grant of relief in favour of the company, it would not be improper to claim both in an unfair prejudice petition.
5. Where in unfair prejudice proceedings a petitioner asks for relief in favour of the company as well as relief that could only be granted on an unfair prejudice basis, case management issues should be addressed. The best course may be for all the issues to be dealt with at the same time, in a single hearing. Sometimes, however, it could be desirable for matters relating to a claim for relief in favour of the company to be deferred either entirely or in part.  It might, for example, be advantageous to determine at the main hearing whether a respondent was liable to the company for a breach of duty but to defer any issue as to quantum.  It was not right (as Lord Scott stated in Chime) that a Court should not “allow a prayer in the petition for payment by the respondent director of compensation or of restitution to the company to stand unless it is clear at the pleading stage that a determination of the amount, if any, of the director’s liability at law to the company can conveniently be dealt with in the hearing of the petition“. The mere fact that it might not be “clear at the pleading stage that a determination of the amount, if any, of the director’s liability at law to the company can conveniently be dealt with in the hearing of the petition” would not render a claim for compensation to be paid to the company in respect of such a liability abusive, but would rather call for case management.
6. The “Chime approach” does not represents the law in this jurisdiction.  In particular, it is not only a “rare and exceptional case” that the Court “will permit to proceed by way of an unfair prejudice petition when it would otherwise be brought by way of a derivative claim“, nor that the Court “ought only to permit the case for that relief to proceed by way of an unfair prejudice petition if, at the earliest stage of the proceedings, the court is satisfied at least that that relief can be conveniently adjudicated on as part of the unfair prejudice petition proceedings“.

In light of the above principles, the Court held that the petitioner’s claims for relief were not abusive.   They accordingly allowed the appeal.

Comment

The approach of the Court of Appeal in Kimionis aligns with that most practitioners had been taking in relation to unfair prejudice petitions, namely to prefer them over derivative actions where both buy-out relief and orders in favour of the company are being sought.

The decision clearly demarcates the potential scope of such petitions.  It provides welcome clarification that the restrictive approach in Chime will not be followed.  The decision should serve to dissuade respondents from seeking to strike out relief in favour of the company except in cases where that is the only relief sought or where (unusually) it is clear that the petitioner has no genuine interest in pursuing those parts of the relief only available in an unfair prejudice petition.

David Lascelles specialises in shareholder disputes. His expertise in this field is recognised by Legal 500 independent guide to the legal profession which recommends David as a top tier practitioner in relation to company law disputes.