Unfair Prejudice and the Companies Act 2006

Published byJohn Grant

26th April 2016

A recent published judgement from Forfar Sheriff Court acts as a useful reminder of the possibility of bringing an unfair prejudice petition in terms of the Companies Act 2006. 

The facts of the particular case (In the Petition of Angela Wishart [2016] SCFOR 29) flow from what appears to have been a particularly acrimonious divorce where both parties were criticised for their approach to previous litigation. 

The Facts

Ms Wishart had previously been employed by her former husband’s service company, which had been set up to minimise tax liability.  She was Company Secretary and an employee, and remained a Shareholder following the separation.  She was then dismissed by the company and stopped receiving payments of salary or dividends. 

Accordingly, she presented a petition claiming unfair prejudice under Section 994 of the Companies Act 2006 and seeking an order under Section 996 of the Act ordering her former husband to purchase her shareholding for a fair market price. 

The Law

The essence of a petition under Section 994 is that the affairs of the company are being conducted in a manner that is unfairly prejudicial to a shareholder’s interest as a shareholder.

The claim can be brought by either shareholders of a company or non-members to whom shares have been transferred. 

While the allegedly unfairly prejudicial conduct must be in relation to the company’s affairs, this is likely to be interpreted widely to reflect that there are a number of situations where commercial realities have to be considered. 

It is also possible to bring a claim based on a single act or omission, albeit the more examples of prejudicial behaviour there are, the better chance there is of the claim succeeding. 

However, it is important to note that there must be both prejudice to the shareholder, as well as unfairness, for such an action to succeed.  If the shareholder is unable to establish that they are worse off due to the conduct complained of then their claim will not get off the ground.  This prevents the courts from being drawn into disputes which are only about fairness or equality, or about straightforward commercial judgements.

Given that what constitutes unfairly prejudicial conduct can be very wide (including mismanagement, excessive pay, inequitable conduct and a deadlock amongst parties), it is unsurprising that, in terms of Section 996 of the Act, the court is given the discretion to make any order it thinks fit for giving relief.  However, most commonly the court is asked to issue orders which:-

• Regulate the conduct of the company’s affairs in the future;
• Require the company to stop acting in a certain way, or require it to carry out an act that it has omitted to do;
• Prohibit changes to the company’s Articles of Association; and
• Provide for the purchase of the members’ shares on such terms as the court thinks fit.  

The Decision

In the recent Sheriff Court case, Ms Wishart was not successful because the Sheriff decided that she had made only a bald averment of prejudice that lacked specification, and accordingly she had not pled a prima facie case of unfair prejudice and so had failed to meet the test mentioned above. 

However, it is worth remembering that there are circumstances in which a Section 994 claim would be the best route to go down if a negotiated settlement between shareholders cannot be reached. 

For more information, please contact Steven Docherty or John Grant in WJM’s Conflict Resolution Team. 

Steven Docherty                sd@wjm.co.uk                        0141 248 3434

John Grant                         jzg@wjm.co.uk                       0141 248 3434