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As and when we emerge from the economic mayhem of the coronavirus, we may witness corporate Darwinism. If so, there may be a significant up tick of complaints that ‘rescue strategies’ unfairly prejudice the interests of minorities.
It will be important for VCT and EIS fund managers to know when such complaints are bogus.
This note analyses the right of a member of a company to petition for relief against unfair prejudice under section 994 of the Companies Act 2006 and the remedies available under section 996 of the Companies Act 2006 with particular reference to the following cases in the period 2012-2020:
Re G&G Properties Ltd, Griffith v Gourgey
Re Bankside Hotels Ltd, Griffith v Gourgey.  1 CA
Michel v Michel  54 Ch D
Re Dinglis Properties Ltd, Dinglis v Dinglis  107 Ch D
Watchstone Group plc v Quob Park Estate Ltd  1 736 Ch D
Re Sprintroom Ltd, Prescott v Potamianos, Potamnianos v Prescott  2 617, CA
Re Edwardian Group Ltd, Estera Trust (Jersey) ltd v Singh  1 171, Ch D
Weatherley v Weatherley  1 520, Ch D
Re Bankside Hotels Ltd, Griffith v Gourgey, Mewslade Holdings Ltd v Gourgey  1 434 Ch D
Re Bankside Hotels Ltd and other companies (No 2), Griffith v Gourgey (No 2) , Mewslade Holdings Ltd v Gourgey (No 2)  2 174 Ch D
Re AMT Coffee Limited  EWHC 46 Ch D
Re Westshield Ltd  EWHC 115 (Ch)
Re Autobody Ringway Limited  EWHC 2336 (Ch).
Wootliff v Rushton-Turner  1 48, Ch D
Wootliff v Rushton-Turner (No 2)  1 479, Ch D
Pinfold v Ansell  2 489, Ch D
Re Charterhouse Capital ltd Arbuthnott v Bonnyman  2 627 CA
Re Blue Index Ltd  EWHC 2680 (Ch).
Apex Global Management Ltd v Fi Call Ltd  1 523, CA
Re I Fit Global Ltd, Blunt v Jackson  2 116 Ch D
Re Sunrise Radio Ltd, Kohli v Lit  1 427, CA
Re Annacott Holdings Ltd, Attwood v Maidment  2 46, CA
Re Tobian Properties Ltd, Maidment v Attwood  2 567, CA
Re Abbington Hotel Ltd, DGrado v D’Angelo  1 410 Ch D
s.994 Petition by company member
(1) A member of a company may apply to the court by petition for an order under this Part on the ground-
(a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
(1A) For the purposes of subsection (1)(a), a removal of the company’s auditor from office—
(a) on grounds of divergence of opinions on accounting treatments or audit procedures, or
(b) on any other improper grounds,
shall be treated as being unfairly prejudicial to the interests of some part of the company’s members.]
(2) The provisions of this Part apply to a person who is not a member of a company but to whom shares in the company have been transferred or transmitted by operation of law as they apply to a member of a company.
(3) In this section, and so far as applicable for the purposes of this section in the other provisions of this Part, “company” means—
(a) a company within the meaning of this Act, or
(b) a company that is not such a company but is a statutory water company within the meaning of the Statutory Water Companies Act 1991 (c 58).
s.995 Petition by Secretary of State
[Not covered in this note]
s.996 Powers of the court under this Part
(1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.
(2) Without prejudice to the generality of subsection (1), the court’s order may—
(a) regulate the conduct of the company’s affairs in the future;
(b) require the company—
(i) to refrain from doing or continuing an act complained of, or
(ii) to do an act that the petitioner has complained it has omitted to do;
(c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;
(d) require the company not to make any, or any specified, alterations in its articles without the leave of the court;
(e) provide 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, the reduction of the company’s capital accordingly.
Members of a company may also seek to: (i) bring actions in the name of the company (derivative actions) ; (ii) petition for the winding up of a company on the grounds that to do so is just and equitable under section 122(1)(g) of the Insolvency Act 1986 (IA 1986); (iii) exercise various other rights under the IA 1986 and the CA 2006.
By way of contrast with the winding up powers of the court, an unfair prejudice petition may not be presented in respect of the affairs of an overseas company.
The reference to conduct that is “unfairly prejudicial to the interests of the members generally or of some part of its members” in section 994(1)(a) makes it clear that conduct affecting all members of a company equally may be unfairly prejudicial. There is no need for a petitioner to establish that he has been treated differently to other shareholders (albeit that this is a factor likely to strengthen his claim of unfair prejudice).
The beneficial owner behind a nominee or trustee cannot bring a direct claim because such a person is neither a member, nor a person to whom shares have been transferred or transmitted by operation of law. That said, in an appropriate case it may be possible for a beneficial owner behind a trust to bring a derivative trust claim joining the trustee as a defendant if the trustee refuses to take steps in relation to unfairly prejudicial conduct).
Both prejudice and unfairness must be shown for relief to be granted (although there is no need to show discrimination as well as unfair prejudice. A member can clearly show prejudice if the economic value of his shares has significantly decreased or is put in jeopardy by the conduct of which the complaint is made (Re Brenfield Squash Racquets Club Limited  2 BCLC 184). However, prejudice justifying a petition is not confined to such economic detriment, especially where it is established that one or more features of a quasi-partnership exist.
The courts are understandably reluctant to introduce vague and subjective notions of fairness and morality into commercial relationships. It is therefore well established that in appraising unfairness and prejudice a court must take an objective approach applying established equitable principles – principles that are more ‘Old Testament’ than ‘New Testament’ in their style – and adopt as a starting point the basis on which the petitioner agreed to become a member of the company.
In the recent case of Re Dinglis Properties Ltd, Dinglis v Dinglis  107 Ch D it was said as follows:
“……as to …the requirement of unfairness:
(i) The concept of unfairness, although objective in its focus, is not to be considered in a vacuum. An assessment that conduct is unfair has to be made against the legal background of the corporate structure under consideration. This will usually take the form of the articles of association. And any collateral agreements and understandings between shareholders which identify their rights and obligations as members of the company;
(ii) These are the terms upon which the parties agreed to do business together, which include applicable rights conferred by statute, the starting point therefore is to ask whether the exercise of the power or rights in question would involve a breach of these terms;
(iii) These terms include, by implication, an agreement that any party who is a director will perform his duties as a director;
(iv) These terms are subject to established equitable principles which may moderate the exercise of strict legal rights when insistence on the enforcement of such rights would be unconscionable;
(v) Agreements and understandings do not have to be contractually binding in order to be enforceable in equity;
(vi) It follows that it will not ordinarily be unfair for the affairs of a company to be conducted in accordance with the provisions of its articles or any other relevant and legally enforceable agreement; unless it would be inequitable for those agreements to be enforced in the particular circumstances under consideration. Unfairness may, to use Lord Hoffmann’s words, “consist in a breach of the rules or in using rules in a manner which equity would regard as contrary to good faith”……..the conduct need not therefore be unlawful but it must be inequitable……..although it is impossible to provide an exhaustive definition of the circumstances in which the application of equitable principles would render it unjust for a party to insist on his strict legal rights, those principles are to be applied according to settled and established equitable rules and not be reference to some indefinite notion of fairness;
(vii) To be unfair the conduct complained of need not be such as would have justified the making of a winding -up order on just and equitable grounds;
(viii) It is not enough merely to show that the relationship between the parties has irretrievably broken down. There is no right of unilateral withdrawal for a shareholder when trust and confidence between shareholders no longer exist. It is, however, different if that breakdown in relations then causes the majority to exclude the petitioner from the management of the company or otherwise to cause him prejudice in his capacity as a shareholder.”
The recent case of Michel v Michel  54 Ch D added the corollary to number (iv) above where it was said:
“ there is no good reason why such equitable considerations should not qualify, as well as add to, the expectations about how the controllers of the company ought to behave to be derived from a simple reading of the articles of association”
and the case also cited with approval the decision in Anderson v Hogg 2000 SLT 634 where it was held that the parties:
“agreed, by their words and conduct, to conduct the affairs of the company on an informal basis which allowed the respondent to exercise powers of management more freely than the articles may have envisaged or permitted. In these circumstances, unfairness has to be assessed against what the members actually agreed rather than against the articles.”
While the prejudice must be unfair, bad faith is not required and the petitioner need not establish the existence of a conscious intention to cause prejudice to the petitioner (Re Sunrise Radio Ltd  EWHC 2893 (Ch)).Once a court is satisfied that a petition under section 994 for relief against unfair prejudice is well founded, it may make an appropriate order.
The most common order is for the shares of the petitioning member to be bought by other members of the company or (in rare cases) the company itself.
The market value of a petitioner’s shares may fall to be further adjusted by reference to the following principles:
(1) Any reduction in the value of the shareholding caused by the unfairly prejudicial conduct will be ignored in ascertaining the value of the shares (Re Sunrise Radio  EWHC 2893 (Ch) at paragraphs 79-81). Likewise the price required to be paid for the shares may be increased to take account of the unfairly prejudicial conduct (Birdi v Specsavers Optical Group Ltd  EWHC 2870 (Ch));
(2) Common adjustments include adding back in excessive remuneration, accounting for unpaid dividends, restoring misappropriated assets, treating directors’ loans as having been repaid with interest, and adding back in losses occasioned by breaches of fiduciary duty. Where a shareholder has wrongfully been excluded from management in an unfairly prejudicial manner the court may also add back the salary that he should have received for providing managerial services and, if possible on the evidence, to take account of how the company would have performed had the excluded shareholder been allowed to participate (for an assessment of the complexities of this approach, see Re Annacott Holdings Ltd  EWHC 3180 at paragraph 13 (this aspect of the decision was not appealed ( 2 BCLC 36 (CA)));
(3) The date of valuation will normally be the date of the purchase order, this being the point at which the unfairly prejudicial conduct comes to an end and the normal date at which a going concern valuation should be conducted (Profinance Trust SA v Gladstone  EWCA Civ 1133 at page 362). However, fairness may require an earlier date such as the date when the petition was presented or the date when the petitioner was excluded from management. This will often be the case where the conduct of the wrongdoing majority has rendered the company insolvent or made arriving at a valuation ignoring the effect of such wrongdoing overly difficult, especially if such conduct occurred at a time when the petitioner was incapable of preventing it (Croly v Good  EWHC 1 (Ch)); Re Cabot Global Limited  EWHC 2287 (Ch));
(4) Interest will not generally be awarded in connection with a purchase order. The shares are owned by the petitioner and nothing is owing until a buy-out order is made; and
(5) A further adjustment is whether a discount should be made to reflect a petitioner’s minority interest.
Until recently the circumstances in which a minority discount would be applied were relatively settled. In a company with quasi-partnership features the court normally required the petitioner to be paid such proportion of the company’s value as a going concern as his shares represented without any discount to reflect the fact that he was a minority shareholder (Re Bird Precision Bellows Ltd  Ch 419 at paragraphs 430-431). Conversely, in a normal trading company a discount was usually included absent exceptional circumstances (Irvine v Irvine No.2  1 BCLC 445 at paragraph 11; Strahan v Wilcock  EWCA Civ 13 at paragraph 17).
This orthodoxy was doubted in Re Blue Index Ltd  EWHC 2680 (Ch). Robin Hollington QC (sitting as a deputy High Court judge) held that the default position should be no minority discount for all companies. To order otherwise would be to reward the oppressing majority and improperly treat the petitioner as if he was a willing seller. An exception to this would be if the shares were originally acquired at a discount.
This approach was considered in Re Autobody Ringway Limited  EWHC 2336 (Ch). The petitioner had been excluded from management in breach of an agreement that he would be involved. While HHJ Hodge held that his removal was justified, it was nevertheless unfairly prejudicial for the respondent to continue to run the company without offering to buy out the petitioner. On the facts of the case HHJ Hodge considered that a minority discount was appropriate because his removal had been justified, the petitioner had only paid a nominal amount for his shares while the respondent had provided the business connections, experience and opportunities that allowed the formation of the company. However, had the circumstances been different, and in particular had the removal not been justified, HHJ Hodge stated that he would have disallowed a minority discount despite the fact that the company was not a quasi-partnership. That the justifiability of the petitioner’s removal from management may serve as a litmus test for the existence of a minority discount or not in cases of this nature was further endorsed in Re Westshield Ltd  EWHC 115 (Ch) at paragraph 138.
The absence of a presumption that there should be a minority discount for companies which are not quasi-partnerships was further confirmed by Fancourt J in Re Edwardian Group Ltd  EWHC 1715 at paragraphs 640 to 652 and  EWHC 873 (Ch) at paragraphs 7 to 13. However, Fancourt J did not consider that the court only had a binary choice between discount and no discount. Instead he emphasised that the task of the court is to find a fair outcome which may involve a more nuanced approach. On the facts of Re Edwardian, this consisted in recognising the very considerable marriage value of the petitioner’s shares for the respondent and requiring 50% of such marriage value to be paid in excess of the share’s market value.
Examples of unfairly prejudicial conduct have been held to include:
(1) Failure to abide by the articles of association or agreements between shareholders and non-compliance with the Companies Act 2006
Failures to abide by the articles of association or agreements between shareholders and non-trivial failures to comply with the CA 2006 constitute a breach of the basis on which a member subscribes for shares in a company and may justify the bringing of an unfair prejudice petition.
Examples of such conduct include: failure to hold annual general meetings, to provide accounts and to disclose interests in a transaction with the company contrary to the CA 2006 (Re Woven Rugs  EWHC 230 (Ch)); making loans to directors without complying with the requirements of section 197 of the CA 2006 or otherwise ratifying the same (Re AMT Coffee Limited  EWHC 46 (Ch) at paragraphs 145-146); registering new members in breach of restrictions on transfers to non-members contained in the articles of association (Re Piccadilly Radio plc (1989) 5 BCC 692); and actions that are inconsistent with the express and implied terms of collateral contracts entered into by shareholders and subsequent agreements, understandings or established patterns of acquiescence governing the basis of their involvement with the company (including rights to be consulted and/or to participate in management) (Fisher v Cadman  EWHC 377 (Ch) at paragraph 90; Re Southern Counties Fresh Food Ltd  EWHC 2810 (Ch) at paragraphs 49-50).
A petition will be amenable to strike out if the grounds relied on in the petition are catered for by the articles of association or a collateral shareholders’ agreement, and the petitioner is by his petition seeking to circumvent those contractually prescribed remedies. As a result, petitions have been dismissed based on alleged exclusion from management where provisions in the company’s articles provided the other members with an option to buy the shares of the petitioning member at a value to be determined by the company’s auditors on him ceasing to be a director or employee of the company (Re Company (No. 4377 of 1986)  1 WLR 102; Holt v Faulks  BCC 50).
However, in situations of quasi-partnership the operation of equitable principles may mean that the conduct complained of is still unfairly prejudicial notwithstanding such contractual provisions. This will especially be the case where participation in management is found to have been part of the understanding pursuant to which the company was established (Re Company (No 00330 of 1991) ex p Holden,  BCC 241).
(2) Diluting the minority’s shareholding
Allotting further shares in the company for the improper purpose of diluting a minority shareholder’s shareholding is an obvious example of unfair prejudice (Re Coloursource Ltd  EWHC 3078 (Ch)). Unfair prejudice may also be established in the context of a rights issue which a petitioning minority shareholder is, in principle, free to take up, if: it is known that the petitioning minority shareholder cannot take advantage of the issue and in breach of fiduciary duty, the directors fail properly to consider the price that could and should be extracted from those willing and able to subscribe for shares. This is especially so where the board are also shareholders in a position to benefit from the making of the rights issue (Re Sunrise Radio Ltd  EWHC 2893 (Ch) at paragraphs 95-96).
(3) Altering articles of association: insertion of compulsory transfer mechanisms
An interim injunction was obtained in Constable v Executive Connections Limited 2005 EWHC 3 (Ch) preventing the implementation of an amendment to a company’s articles of association obliging a member to sell his shares should an offer be received for the purchase of all of the company’s shares which 75% of its shareholders approved. It was argued that the amendment to the articles was a commercial judgment made by the majority shareholder (for which the court was not in position to substitute its own judgment). Reliance was also placed on the fact that the shareholder was to receive in excess of market value for his shares under the drag along mechanism with the result that the amendment could not be regarded as unfairly prejudicial. Notwithstanding these considerations, the court considered it arguable that the amendment was an impermissible use of majority shareholder power and that the balance of convenience favoured an injunction. Regrettably the case did not proceed beyond this interlocutory stage and there was therefore no opportunity for a more definitive answer to this question to be given.
That a petitioner is likely to face an uphill struggle in relation to any such challenge is indicated by the decision of the Court of Appeal in Arbuthnott v Bonnyman & Ors  EWCA Civ 536 (20 May 2015). In that case, it was held that amendments to a company’s articles of association, including to drag along provisions, were not invalid and did not involve unfairly prejudicial conduct under section 994 of the CA 2006. The judge had found that there was no evidence of bad faith or improper motive. Instead, the amendment of the articles was said to have been no more than a tidying-up exercise and had not introduced any major change from the shareholders’ agreement or the unamended, original articles. Indeed, on the face of it the changes (making the articles clearer and more consistent and facilitating the transfer and registration of shares compulsorily acquired) were for the benefit of the company even if they also benefited the majority shareholders as such. The Court of Appeal upheld this decision on the grounds that the respondent majority shareholders had considered they were acting in the best interests of the company as a whole.
The judgment contains a list of principles, extracted from the case law, regarding the circumstances in which alterations to the articles of association would be held to be invalid:
a) The limitations on the exercise of the power to amend a company’s articles arise because, as in the case of all powers, the manner of their exercise is constrained by the purpose of the power and because the framers of the power of a majority to bind a minority will not, in the absence of clear words, have intended the power to be completely without limitation. These principles may be characterised as principles of law and equity or as implied terms (Allen v Gold Reefs of West Africa Limited  1 Ch 656; Assenagon Asset Management SA v Irish Bank Resolution Corpn Ltd  EWHC 2090 (Ch)).
b) A power to amend will be validly exercised if it is exercised in good faith in the interests of the company (Sidebottom v Kershaw Leese and Co Ltd  1 Ch 154).
c) It is for the shareholders, and not the court, to say whether an alteration of the articles is for the benefit of the company. But it will not be for the benefit of the company if no reasonable person would consider it to be such (Shuttleworth v Cox  2 KB 9; Peters’ American Delicacy Co v Heath (1939) 61 CLR 457).
d) The view of shareholders acting in good faith that a proposed alteration of the articles is for the benefit of the company, which cannot be said to be a view which no reasonable person could hold, is not impugned by the fact that one or more of the shareholders were actually acting under some mistake of fact or lack of knowledge or understanding (Peters’ American Delicacy Co v Heath (1939) 61 CLR 457 at 491). In other words, the court will not investigate the quality of the subjective views of such shareholders.
e) The mere fact that the amendment adversely affects one or more minority shareholders and benefit others does not, of itself, invalidate the amendment if the amendment is made in good faith in the interests of the company (Sidebottom v Kershaw Leese and Co Ltd  1 Ch 154; Shuttleworth v Cox  2 KB 9; Citco Banking Corp NV v Pusser’s Ltd  UKPC 13; Peters’ American Delicacy Co v Heath (1939) 61 CLR 457).
f) A power to amend may also be validly exercised even though the amendment is not for the benefit of the company because it relates to a matter in which the company as an entity has no interest but rather is only for the benefit of shareholders as such or some of them. This will not, however, be the case if the amendment involves oppression of the minority, is otherwise unjust or is outside the scope of the power (Peters’ American Delicacy Co v Heath (1939) 61 CLR 457; Assenagon Asset Management SA v Irish Bank Resolution Corpn Ltd  EWHC 2090 (Ch)).
g) The burden is on the person impugning the validity of the amendment of the articles to satisfy the court that there are grounds for doing so (Citco Banking Corp NV v Pusser’s Ltd  UKPC 13; Peters’ American Delicacy Co v Heath (1939) 61 CLR 457).
While this guidance indicates that successful challenges will be rare, the Arbuthnott decision was predicated on a finding that the alteration to the articles had not introduced any major change from the compulsory transfer provisions that existed in the articles before the alteration. It therefore remains undecided whether an amendment of articles to insert drag along rights for the first time will be invalid or involve unfairly prejudicial conduct under section 994.
(4) Breaches of fiduciary duty
If real prejudice has been suffered as a result of a breach of fiduciary duty then a claim for unfair prejudice may be grounded, this may include damage to the parties’ relationship of trust and confidence; and breaches of duty entailing the misuse or misappropriation of company assets or the procurement of an allotment of shares to dilute a minority’s interests will be unfairly prejudicial. Articles of association may release the directors from the breach of fiduciary duty but a ratifying resolution may itself amount to unfair prejudice. Directors must exercise their fiduciary duties and powers of management in the interests of the company as a whole. Sometimes doing so will require the taking of steps that are prejudicial to some of the members to secure the future of the company. Those steps will not be regarded as unfair.
(5) Exclusion from management
Where parties come together to use a company, become shareholders in it, and it is clear that their intended purpose is for each of them to participate in the management of the company through an appointee or appointees on the board, the removal of such appointees in breach of the intended arrangement or understanding may justify a minority shareholder in bringing unfair prejudice proceedings (Re Woven Rugs  EWHC 230 (Ch)). The rationale and policy aim is essentially that “…the unfair prejudice remedy is a means of encouraging proper corporate behaviour in the management of smaller companies and in building up the confidence of investors in them…” (Re Tobian Properties Ltd, Maidment v Attwood  2 567, CA).
It is important to note further that the court has found that “there is no rule of law that every breach of fiduciary duty will necessarily render exclusion from management fair: it is always a question of fact and degree”(Re Sprintroom Ltd, Prescott v Potamianos, Potamnianos v Prescott  2 617, CA).
(6) Exclusion from management: Quasi-partnerships.
A key commercial difference between petitions for unfair prejudice based on exclusion from management within a quasi-partnership and other situations in which a petitioner may complain of unfair prejudice is that no discount will be applied to a valuation of the shares held by the petitioner to reflect the fact that his shareholding is a minority holding.
If a quasi-partnership exists it will almost always be unfair for the minority shareholder to be excluded from management without an offer to buy his shares or make some other fair arrangement. Prejudice may be damage to the value of shares but may also extend to other financial damage which in the circumstances of the case is bound up with a member’s position to participate in the income or profits of a company in the capacity as a manager
The recent case of Re Dinglis Properties Ltd, Dinglis v Dinglis  107 Ch D is a good example of this point. The petitioner failed to establish a relationship between himself and his father amounting to a quasi-partnership, notwithstanding that the petitioner had taken executive decisions and put up personal guarantees for certain loans, but he succeeded in his claim for unfair prejudice based on his father’s breach of fiduciary duties. However, his shareholding was valued as a minority shareholding after an appropriate discount.
Quasi-partnerships, are a species of private company described by Lord Wilberforce in Re Westbourne Galleries Ltd  AC 360 as involving one or more of the following aspects: (i) A relationship of mutual confidence between shareholders; (ii) An understanding that all or some of the shareholders will participate in the conduct of the business; and (iii) Restrictions on the transfer of shares.
In Re a company (No 005685 of 1988) ex p Schwarcz (No 2)  BCLC 427 which was cited with approval in Dinglis it was said that
“…the fact that the company is small or private is not enough and that mutual trust and confidence would not itself be sufficient to make the members’ association in substance a partnership with partner-like obligations owed by each member to the others in the absence of proof of a mutual understanding as those obligations”
And also in Re Guidezone Ltd, Kaneria v Patel  2 BCLC 321
“……… equity will not hold the majority to an agreement, promise or understanding which is not enforceable at law unless and until the minority has acted in reliance on it. In the case of an agreement, promise or understanding made or reached when the company was formed, that requirement will almost always be fulfilled, in that the minority will have acted on the agreement, promise or understanding in entering into association with the majority and taking the minority stake. But the same cannot be said of agreements, promises or understandings made or reached subsequently, which are not themselves enforceable at law. In such a case, the majority will not as a general rule be regarded in equity as having acted contrary to good faith unless and until it has allowed the minority to act in reliance on such an agreement, promise or understanding”
Whether or not mismanagement is sufficiently serious falls to be appraised by reference to the following criteria among others: the scale of financial loss arising; and the frequency and duration of acts or omissions constituting mismanagement. In Re Woven Rugs  EWHC 230 (Ch) for example, the refinancing of a company at its expense and to the detriment of the minority shareholders, particularly where there was no bona fide justification for the re-financing, was considered sufficient grounds for an unfair prejudice claim. Here an unsecured interest-free debt was replaced by secured indebtedness carrying interest at a commercial rate. The court noted that the action of the director had sole the purpose and effect of preferring the interests of a third party over those of the company and the minority shareholders.
(8) Failure to pay dividends.
Unfair prejudice may be established where the payment of a certain level of dividend (if justified by the company’s financial position) was part of the basis on which the petitioner became a member of the company and payments below this level are received without justification. Unfair prejudice may also be established where the only reason dividends have not been paid is because all distributable profits have been exhausted by the drawing of excessive remuneration, especially where such excessive remuneration has been paid to shareholder directors.
(9) Payment of excessive remuneration.
A disguised payment of dividend or dressed-up return of capital, will be unfairly prejudicial conduct even where approved by the shareholders in general meeting. Where remuneration has not been approved bythe board of directors, shareholders or otherwise in accordance with the articles of association, a greater degree of judicial scrutiny is permitted.
In the case of Re Tobian Properties Ltd, Maidment v Attwood  2 567, CA, further established the principle that restrictions on the manner in which shareholders could enforce the liability of directors for wrongs to the company cannot be imposed on minority shareholders. The court considered that in the initial court hearing the judge was wrong to hold that a director’s conduct was not unfairly prejudicial because the minority shareholder could have found the information about the excessive remuneration from the accounts which were filed at Companies House. Notably, this imposed “a requirement for diligence that had no basis in the statutory provisions or in principle or authority.”
(10) Removal of auditors
To give effect to article 38 (restricting the basis on which statutory auditors may be dismissed) of EU Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, section 994(1A) of the CA 2006 deems the removal of a company’s auditor to constitute unfair prejudice if done on the grounds of a divergence of opinion on accounting treatments or audit procedures, or on any other improper grounds.
In conclusion, it seems clear from recent case law that it is the relationship between the shareholders that must be the focus of inquiry; a relationship is not static. A relationship that attracts equitable considerations may arise before or after incorporation and that articles of association are no always a complete code for how a company is governed as the legitimate expectations arising from the agreements or understandings of the members inter se will also be taken into consideration.
Unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith; the conduct need not therefore be unlawful, but it must be inequitable.
This is not an easy hurdle to surmount. As in the case of Re Dinglis Properties Ltd, Dinglis v Dinglis  107 Ch D the recent case of Michel v Michel  54 Ch D also decided against the petitioner in finding that there was no evidence of an agreement, understanding or clearly established pattern of acquiescence on the part of the petitioner which may have led the respondents to act or continue to act in a particular way towards him so that it could be said that it gave rise to an equitable constraint preventing a departure from the articles.