In a single judgment handed down on 27 April 2022, Lady Justice Andrews allowed an appeal against the dismissal of an unfair prejudice petition under section 994 of the Companies Act 2006.
The judgment provides welcome clarity on the circumstances in which delay in bringing an unfair prejudice petition will see the petition fail at an early stage.
Where granted, an unfair prejudice petition gives the court wide-ranging powers to intervene in a company’s affairs: it is a measure of last resort for shareholders without adequate recourse under the company’s internal decision-making mechanisms.
Often, for pragmatic reasons, an affected shareholder will petition soon after the conduct complained of has occurred. No statutory limitation periods bar unfair prejudice petitions, though, where there is a long delay between the conduct in dispute and the unfair prejudice petition being brought, the petitioner may be taken to have “acquiesced” in the conduct. In such cases, the court will not hear the claim because it would be unfair to do so.
Remarkably, the petition in this case was made more than seventeen years after the petitioner’s solicitors declared their intention to do so. By that point, the respondent company had been dissolved. However, despite that, as summarised below, Andrews LJ allowed this appeal.
In addition to clarifying when a lapse of time will prevent the bringing of an unfair prejudice petition, Andrews LJ’s judgment reflects on: the practical value of good legal strategy; the importance of preserving documentary evidence as soon as litigation is in view; and the benefits of adopting alternative dispute resolution procedures.
Background
The dispute centres on Cherry Hill Skip Hire Ltd (the “Company”), established by a mother and son in 1982 as shareholder/directors. The petitioner son (the “Petitioner”) originally held 49% of the shares. Within three years, the Petitioner was excluded from the day-to-day management of the business, though he was not formally removed as a director until a resolution was passed on 3 September 1999, at which point his daughter replaced him as director.
Between 2001 and 2003, the Petitioner’s solicitors wrote letters to the Company’s solicitors requesting accounts from 1997 onwards and other information relating to the Company’s affairs. This was intended to lay the groundwork for a buy-out of the Petitioner’s minority shareholding in circumstances where the Petitioner suspected that steps had been taken to deliberately devalue his shareholding.
In the course of this correspondence (between May 2001 and March 2003) the Petitioner’s solicitors indicated an intention to petition for relief against unfair prejudice under the Companies Act in force at the time (section 459 of the Companies Act 1985, since replaced by section 994 of the Companies Act 2006). No such petition was brought for more than seventeen years, until July 2020, when upon seeing a notice in the Gazette for the dissolution and striking off of the Company, the Petitioner felt himself “left with little option but to commence legal proceedings”.
The Petitioner’s daughter and son claimed to have been gifted the 49% shareholding by the Petitioner in 2007, thereby ending the Petitioner’s participation in the company. However, no stock transfer forms appear to have been executed, share certificates were not handed over, and there is no evidence of the payment of stamp duty accompanying the registration of the share transfer. Furthermore, the register of shareholders was missing, leaving the purported transfer of shares in doubt.
The High Court ex tempore decision
The Petitioner, acting in person, issued an unfair prejudice petition in July 2020. The amended petition alleged that the Petitioner “(a) had been excluded from participation in the running of the Company, and (b) had been denied his rights as a shareholder, including his right to see the Company’s accounts and to attend an AGM each year, and the receipt of dividends when the Company was profitable.”
The first three named respondents (Cherry Hill Skip Hire Limited, Cherry Hill Holdings Limited and Cherry Hill Waste Limited) were dissolved companies. The fourth and fifth respondents were the Petitioner’s mother and daughter (the “Respondents”).
The case proceeded to a preliminary issues hearing in the High Court, following an application by the Respondents to strike out the petition pursuant to Rule 3.4(2) of the Civil Procedure Rules because, among other things, the Petitioner had allowed so many years to pass that his “claim for relief [was] bound to fail.”
At the preliminary issues hearing, HH Judge Stephen Davies, sitting as a High Court judge, dismissed the petition for delay and acquiescence, on the basis that “even if [the Petitioner] made good his allegations at trial, it was plain and obvious that the delay in itself would render it inequitable for him to obtain relief.”
The Appeal
On appeal, the Petitioner sought to revive the parts of his unfair prejudice petition which related to events in the period beginning in 2001.
The Respondents sought to uphold the preliminary issues judgment on the alternative basis that the Petitioner’s claim was not really a section 994 petition, but, in substance, a claim for breach of the directors’ fiduciary duties, which meant that only the company had standing to sue, and that such claims were, in any case, time barred.
Andrews LJ approached the central issue of delay and acquiescence at issue as it had been approached by Fancourt J in Edwardian Group Ltd, Re [2018] EWHC 1715 (Ch) who considered whether, “in view of the delay and the reasons for the delay, it is unfair or inappropriate in all the circumstances for the Petitioners to obtain the relief that they seek.” If unfair or inappropriate in all the circumstances, the Court would exercise its discretion to refuse the petition.
In the key passage of her judgment about the effect of delay on an unfair prejudice petition, Andrews LJ remarked:
“It seems to me that, where delay is concerned, there is a distinction to be drawn between a shareholder who knows he has been excluded from active involvement in the company’s affairs and fails to complain about that for many years, and a passive shareholder who knows he is not getting the company’s accounts or an invitation to the AGM and is not receiving dividends and does nothing about any of those matters, but then discovers years later that money or corporate opportunities have been diverted from the company for the benefit of its directors, and moreover, that his shareholding was apparently expropriated in 2007. The distinction lies in the fact that in the absence of evidence to the contrary, a shareholder is entitled to assume that the company is being managed properly by its directors in accordance with their fiduciary and statutory duties, and that its constitution has been followed.” (emphasis added, paragraph 46).
Her point seems to be this: although the law will not protect a shareholder who knows he is being unfairly prejudiced and does nothing about it for a long time, it will also not require a shareholder to actively police his company’s directors.
Consequently, Andrews LJ tempered this conclusion, with the remark that, “there may come a time when even misfeasant directors are entitled to say that it is too late to complain about past wrongdoing” and that there was a significant risk that, once heard again at trial, the equitable relief sought might yet be refused because of the delay. Nevertheless, the outcome – depending upon the way the evidence pans out at trial – was “by no means a foregone conclusion”.
Andrews LJ allowed the appeal, staying proceedings so that steps could be taken to restore the Company to the register, during which time the parties could reflect on the merits of mediation, and the petition could also be re-amended “to put it into proper order.”
Other points of note
Mediation
Andrews LJ’s recognition that this sort of legal dispute could be dealt with faster and more cheaply by mediation aligns with the court’s duty under Rule 1.4(2)(e) of the Civil Procedure Rules to encourage the parties to consider alternative dispute resolution where appropriate.
Mediation is not a new feature of dispute resolution, but it is one which is quietly gaining popularity because of its effectiveness at preventing the aggravation of disputes, and affecting their cost- and time-efficient settlement, so much so that the UK Government has said that the UK’s mediation sector is worth £17.5bn as of 2020 and is now considering becoming a signatory of the Singapore Convention on Mediation.
The Preservation of Documents
Towards the end of her judgment, commenting on the limited number of relevant documents, Andrews LJ remarked that “One would have expected a responsible solicitor receiving the correspondence from the [Petitioner’s] solicitors in 2001 to have advised their clients to hold on to important documents.”
Since so many documents exist exclusively in digital form (where a single keystroke could obliterate terabytes of data), this is a reminder that it is more important than ever for legal representatives to advise their clients, at an early stage of the need to preserve documents which might later prove relevant to the dispute.
Both Practice Direction 31B and Practice Direction 51U of the Civil Procedure Rules now oblige legal representatives to notify their clients of the need to preserve disclosable documents as soon as litigation is contemplated.
The practical impact of good legal strategy
Andrews LJ expressed her “significant sympathy” with the first instance judge, “not least because of the way in which the case was presented.”
Among other things, at first instance, both sides “drew no line between matters occurring before and after 2001” so that the judge had to consider events spanning almost four decades.
By contrast, on appeal, the Petitioner’s case was put across in a “more restricted and focussed way”: an important strategic decision had been made only to pursue claims made in respect of the post-2001 events.