Delay in unfair prejudice proceedings

Section 944 of the Companies Act 2006 serves to protect minority shareholders in circumstances where the affairs of a company are being conducted in a manner which is unfairly prejudicial to their interests. The most common remedy is an order for the purchase of the minority shareholding.

Mills & Reeve recently represented the respondent in potential S994 unfair prejudice proceedings. The respondent argued at mediation that because the petitioner had not issued a petition three years after he had resigned from the company, in which he complained about unfairly prejudicial conduct over several years, that there was a risk that the court could exercise its general discretion to refuse to allow the petition to proceed due to inordinate and unexplained delay. Alternatively, we also argued that the petitioner had acquiesced in failing to take appropriate action at the material time. Of critical importance to the argument was the fact that the respondent’s principal witness, against whom most of the allegations had been made, had died before a petition had been issued.

Whilst there is no limitation period for the commencement of unfair prejudice proceedings, there is a risk that if a petitioner delays in issuing a petition that they may have been said to have acquiesced in respect of any unfairly prejudicial acts which were known to him and/or have delayed too long in taking appropriate legal action so as to prejudice the respondent.

At the mediation, Mills & Reeve relied on the case of Re Grandactual [2005] EWHC 1415. In this case the respondents applied for an order striking out a petition in circumstances where the acts complained of, and in which the petitioner had participated, had occurred nine years before the petition was issued. The court stated that it would not countenance proceedings where the petition was presented nearly 10 years after the events complained of and struck out the petition.

Further guidance has now been handed down by the Court of Appeal in Re Cherry Hill Skip Hire Limited [2022] EWCA Civ 531. This case concerned a family-owned company established in 1982 where a mother held 51% of the shares and her son 49%. Various allegations were made by the son with regard to the conduct of the business as a result of which he was excluded from the company’s management in 1985. In 1999 his daughter replaced him as a director. The company stopped trading in 2019 and in January 2020 an application was made to dissolve the company, but not before various attempts had been made by the petitioner from 2001 to 2003 to gain access to the company’s books, including threatening a S994 petition. The petitioner finally issued a petition in July 2020 but the company was dissolved in October 2020 before his petition could be determined.

At first instance, as in the Re Grandactual decision, the Court dismissed the petition on the grounds of delay and acquiescence as a preliminary issue. The petitioner applied to the Court of Appeal.

In its judgment the Court of Appeal relied upon the judgment of Fancourt J in Re Edwardian Group Ltd, Estera Trust (Jersey) Limited and another v Singh and others [2018] EWHC 1715 (Ch) which concerned a delay of approximately four years from the acts complained of to the issue of the petition. The Judge approached the issue of delay on the basis of whether the delay and the reasons for the delay meant it would be “unfair or inappropriate in all the circumstances” for the petitioners to obtain relief. If so, the court should exercise its discretion to refuse it.

Fancourt J refused the application of the respondents to strike out the petition on the grounds that inter alia the delay did not cause substantial prejudice to the respondent and that it would be disproportionate to deny a remedy to the petitioner.

Applying this reasoning, the Court of Appeal in Re Cherry Hill Skip Hire Limited stated that it was important when considering the issue of whether a petitioner has acquiesced and lost the right to petition to distinguish between a shareholder who knows that they are being excluded from the company but fails to act, and a passive shareholder who having failed to act subsequently discovers many years later that monies were diverted from the company for the benefit of its directors to the detriment of the petitioner’s shareholding.

In her judgment, Lady Justice Andrews commented that “in the absence of evidence to the contrary, a shareholder is entitled to assume that the company is being managed properly.”  She added that failing to take action didn’t necessarily imply that the shareholder had acquiesced on any misconduct by the respondent in circumstances where such conduct may be ongoing or where it might occur in the future. Looking at the facts, the court concluded that although there was a risk that with the passage of time evidence might be impacted, there were sufficient recent events which could be presented at trial to warrant reconsideration.

On this basis the Court of Appeal upheld the appeal staying the proceedings to allow the company to be reinstated and various amendments to the petitioner’s pleaded case.

It’s clear from the decision of the Court of Appeal that the court will look at all the circumstances of the case in order to weigh up whether on the merits it would be unfair or inappropriate to grant the relief sought. A major factor will always be the extent to which the delay has resulted in prejudice to the respondent.

The case that we acted on was settled at mediation on advantageous terms to our client. He believes that the impact of the death of the respondent’s principal witness would have given the court pause for thought on whether they would allow the petitioner to proceed, given it would have presented a serious impediment to the respondent’s ability to defend the proceedings.

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