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30th October 2023

Unfair Prejudice

Alexander Mullin

Alexander Mullin

What is Unfair Prejudice?

A member of a company may seek relief from the courts where the affairs of the company are being conducted in a manner that is ‘unfairly prejudicial’ to the member’s interests, or an actual or proposed act or omission of the company is or would be so prejudicial (s.994, Companies Act 2006).

Who can Claim Unfair Prejudice?

Any member of a company can bring a claim for unfair prejudice.

It is most commonly minority shareholders who bring such claims, however it is not unheard of for majority shareholders to do so.

The Legal Test of Unfair Prejudice

There are several requirements that need to be met if unfair prejudice is to be established.

  • The unfairly prejudicial conduct must be in respect of the company’s affairs.
  • The unfairly prejudicial conduct must relate to members’ interests as members.
  • A petition may be presented on the basis of a single act or omission and in respect of potential conduct.
  • Both prejudice and unfairness must be shown for relief to be granted. If the member petitioning is unable to show that they have suffered as a result of the conduct, their claim is bound to fail, even if it is proven that the conduct is unfair.

Examples of Unfair Prejudice

A typical example of unfairly prejudicial conduct is where a majority shareholder of a company, acts as if the company is their own personal bank and misappropriates company assets for personal use.

Another example is when a member is unjustifiably excluded from management decisions within the company where there is a genuine expectation by the member to be included.

Further examples include, a failure to pay an agreed dividend amount, intentionally diluting a minority shareholder’s shareholding and prejudice caused by a director’s breaches of their fiduciary duties.

Proving Unfair Prejudice

It is important for a petitioner to prove that they have suffered financially as a result of the conduct of a fellow member. As a result, oral evidence is often not enough. It is important to produce as much contemporaneous evidence as possible, which often proves difficult for a member when they have been excluded from the management of the business, or if information has been withheld.

Remedies for Unfair Prejudice

There are an array of options open to the Court once it has been established that the petitioner has been unfairly prejudiced. The Court has a wide discretion to make any order, so long as it is considered a fair and equitable remedy for the unfair prejudice endured.

Some remedies are more common than others, as the Courts tend to be hesitant to be seen to be “policing” the management of a company.

Common remedies include:

  • An order for directors to transfer property to the company which was acquired in breach of their fiduciary duties.
  • An order requiring the company to refrain from or compelling them to do a particular act this can include amendments to the Articles of Association.
  • An order for the minority shareholder to purchase the majority shareholder’s shares.
  • An order winding up (liquidating) the company. The most common remedy however is that that the majority shareholder is ordered to buy the petitioner’s shares at fair value and on terms to be determined by the court.