Unfair prejudice claims & the "desirability test" for removing parties

The High Court has recently ruled that it is appropriate to remove parties as respondents to a petition under section 994 of the Companies Act 2006 (the Act) when no substantive remedy is sought against them, despite the wide jurisdiction in respect of relief afforded to unfair prejudice petitions. Further, it was held that section 994 should not be used as a means of seeking judgment on causes of action that are wholly distinct from the unfair prejudice claim itself.

Introduction

Under section 994 of the Act, a member of a company may petition for relief where the affairs of the company have allegedly been conducted in a manner that is unfairly prejudicial to the interests of some or all of its shareholders (being an "unfair prejudice petition").

In this case, the High Court considered the preliminary issue of whether two respondents should be removed from an unfair prejudice petition. In doing so, the Court had regard to its discretionary powers under CPR r.19.2(3) to remove parties if it is "not desirable for that person to be a party to the proceedings", which is known as "the desirability test".

Background

Adam Farnsworth (the Petitioner) and Kevin Chave (the First Respondent) are joint equal shareholders in Essex and East London Van Services Limited (the Company).

The First Respondent's son, Aaron Chave (the Second Respondent), joined the Company in 2014 as a fitter and resigned in 2023 as a senior fitter. Upon his resignation, the Second Respondent was given a 25% shareholding in a dormant company, Kent Van Solutions Limited (the third respondent, KVSL) by the First Respondent and was made a director. Subsequently, KVSL commenced trading as a competitor to the Company.

The Petitioner alleged that the actions undertaken by both the First Respondent and Second Respondent to revive KVSL amounted to a conspiracy to cause harm to the Company.

The events resulted in both the Petitioner and First Respondent bringing unfair prejudice petitions which sought orders for the Petitioner to buy out the First Respondent's shareholding in the Company. However, they disagreed on when the valuation of the shares should take place, and what the valuation should be. These issues turned on whether the Court considered there to be unfair prejudicial behaviour by either parties or both.

Before the matter progressed to trial, the Court considered as a preliminary issue whether the Second Respondent and KVSL should be removed as respondents to the Petitioner's unfair prejudice petition, given they wanted to be released, whilst the Petitioner wished for them to remain.

Application of the 'desirability' test

The exercise of the Court's discretion under CPR r.19.2(3) to remove parties turned on the assessment of the desirability of the respondents being parties to the proceedings "in light of the overriding objective of enabling the court to deal with cases justly and at proportionate cost".

In order to assess the "desirability" of the Second Respondent and KVSL being parties, the Court considered the warning in Re Little Olympian Each-Ways Ltd, which provided that it is abusive to require a respondent to remain a party if "the likelihood of relief against a party were so remote as to be perfectly hopeless". The Court extrapolated from the warning in Re Little Olympian that it would be equally "wrong to draw someone into litigation when no substantive remedy is sought against them".

Against this backdrop, the Court turned to the first requirement of an unfair prejudice petition – "that the petitioner both plead and prove that the respondent was concerned either directly or indirectly in conducting the affairs of the company in an unfairly prejudicial manner."

The Court observed that the focus of the pleaded unfairly prejudicial conduct was attributable solely to the First Respondent. The Second Respondent was "merely" a fitter, who did not have a managerial or directorial role, and KVSL was a separate company. As such, neither of these respondents were involved in the "conduct" of the Company's affairs.

Rather, the Petitioner's allegations against the Second Respondent personally were that he had breached restrictive covenants in his employment contract. However, this was purely a contractual matter and so there was no unfair prejudice to the Petitioner in his capacity as a member.

As such, the Court pointed out that "no meaningful relief" was being sought against either the Second or KVSL.  Instead, the petition was seeking authorisation under section 996(2)(c) of the Act to bring civil proceedings in the Company’s name.

Putting aside the issue that authorisation is not a relief in an unfair prejudice petition, the Court considered whether such a petition was "sufficiently substantial to justify" the inclusion of the two respondents as parties to "a lengthy and expensive petition for matters in which no remedy is sought against them."

The Court ruled that it was not for two reasons.

Firstly, the authorisation was likely to be "otiose" given that both the underlying petition and counter-petition sought orders requiring the Petitioner to purchase the First Respondent's half of the Company's shareholding. Regardless of the outcome, the Petitioner would gain control of the Company and could cause the Company to commence Part 7 proceedings against the Second Respondent and KVSL without authorisation from the Court.

Secondly, the unfair prejudice petition was an attempt to circumvent the need for Part 7 proceedings. By including the Second Respondent and KVSL as parties, the unfair prejudice petition would have resulted in binding findings of fact on the conspiracy allegations, which would have made Part 7 proceedings either unnecessary or a formality. The practical effect of granting the pleaded relief of authorisation would be to determine the subsequent Part 7 proceedings in advance. This would amount to an abuse of the unfair prejudice jurisdiction.

The Court further expanded on the second point, stating that it would be disproportionate to require the respondents to "participate and fund what amounts to a trial of corporate claims against them, but dressed up as a petition about unfair prejudice to a shareholder."

As a result, the Court held that the Second Respondent and KVSL should be removed from the proceedings given no direct or meaningful relief was being sought against them. Rather, their inclusion amounted to an attempted pre-determination on the conspiracy allegations which would then either "obviate the need for Part 7 proceedings or make them uncontroversial", which was tantamount to an abuse of process. 

Practical Implications

This decision serves as a reminder that, while section 994 petitions may afford petitioners a wide range of potential parties against whom relief could be sought, the Court will exercise its discretion and restrict the scope of applicable respondents. The relief sought against respondents must be meaningful and sufficient.

This case highlights that parties should be mindful that the Court will apply a strict interpretation of the requirement both to plead and prove that any respondents were conducting company affairs in an unfairly prejudicial manner. Parties that are relevant to the facts but are acting in a capacity that sits outside of the conduct of the company's affairs should be treated as witnesses and, if necessary, third-party disclosure under CPR r.31.17 should be sought.