High Court finds strike out of response to unfair prejudice petition does not automatically entitle petitioner to relief

In a recent judgment, the High Court has considered the extent to which petitioners in relation to unfair prejudicial conduct of a company's affairs can obtain relief simply on the basis that a respondent's defence has been struck out: Re Bankside Hotels Ltd, Re Pedersen (Thameside) Ltd, Re G&G Properties Ltd [2018] EWHC 1035 (Ch). The decision reconfirms that, because relief from unfair prejudice is at the court's discretion, the court must satisfy itself that unfair prejudice has occurred even where the allegation is no longer contested.

The court held that CPR 3.5, which allows a party to obtain judgment without the need for a trial where its opponent's statement of case has been struck out, did not apply to unfair prejudice proceedings. The precise application of the CPR to unfair prejudice proceedings remains uncertain. However, the approach taken by the judge is instructive – the underlying principle of the statutory scheme is that the judge must be satisfied that a petition is well founded and, as a result, provisions of the CPR which deny the judge the opportunity to consider whether he or she is so satisfied will not apply.

Gary Milner-Moore and Andrew Cooke consider the decision further below.

Background

Section 994 of the Companies Act 2006 permits a member of a company to petition the court on the ground 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 specific members. Where unfair prejudice is established, s.996 gives the court a broad discretion to make such order as it thinks fit in order to relieve the unfairly prejudicial conduct. The most common remedy is that the respondent shareholders are required to purchase the petitioner's shares for the value which the shares would have had if the unfair prejudice had not occurred.

In the present case, three unfair prejudice petitions were issued in respect of a group of companies in which a father and his two sons held a significant economic interest. The long-running proceedings involved detailed factual allegations as to the conduct of the group over a significant period.

The proceedings had already resulted in four High Court judgments dating back to 2014. As a result of one of these earlier judgments, the father's points of defence in response to the first petition were struck out, together with the sons' points of defence in response to the third petition. Other respondents' points of defence were not struck out, so there remained live issues in dispute in the proceedings.

The strike out was upheld on appeal. The petitions therefore came back to the High Court for a further hearing to consider the steps necessary to dispose of the petitions. At the further hearing, Sir Nicholas Warren was asked to consider the extent to which the petitioner needed to adduce any evidence to establish unfair prejudice sufficient to found relief against the father and sons. The petitioner contended that the father and sons could no longer challenge the facts in the petitions because their points of defence had been struck out; as a consequence, the petitioner was entitled to relief and the court should move straight to determining the extent of that relief. The father and sons argued that the court could not simply grant the relief sought by the petitioner. Instead, the petitioner was required to make out his case at trial.

If the court concluded that a trial should occur, there was then a subsidiary question as to the case the father and sons would be permitted to put at trial, given that their points of defence had been struck out.

Decision

The court held that the petitioner would need to prove his case despite the strike out of the response to the petition.

In a detailed judgment, Sir Nicholas Warren first reminded himself that the statutory scheme does not provide any entitlement to relief even where unfair prejudice is established. Any relief which is granted is wholly within the discretion of the court. Section 996 provides that the court may only grant relief if it is satisfied that the petition is well founded. Under CPR 3.5, where a statement of case has been struck out, the successful party can apply to obtain judgment without the need for a trial. The CPR are applicable in unfair prejudice proceedings only to the extent that they are not inconsistent with the statutory scheme.

The petitioner's position was that, where a defence fails to deal with an allegation, the defendant is taken to admit that allegation. Necessarily, therefore, where the father and sons' points of defence had been struck out, the petitioner's allegations had not been dealt with and should be treated as admitted. There was no need for a trial to determine the facts alleged in the petition and, where CPR 3.5 provided that the petitioner could simply apply for judgment, it would be irrational for the court to hear a trial. The petitioner accepted that the father and sons could appear at a hearing to argue that the facts, as deemed admitted, did not amount to unfair prejudice.

The judge concluded that CPR 3.5 was inconsistent with the statutory scheme and so did not apply in unfair prejudice petitions. The court was required independently to determine whether the petition was well founded. The petitioner could not simply proceed to judgment.

The CPR provision that an allegation which is not dealt with in a defence should be treated as admitted did not assist the petitioner. This procedural rule could not override the statutory requirement that the court must be satisfied that a petition is well founded before relief can be granted. This is a jurisdictional hurdle which cannot be overcome by deeming provisions. Further, in cases like the present, where there are other respondents whose points of defence have not been struck out, the court cannot deem unfair prejudice to be proven against one respondent but not another; there has either been unfairly prejudicial conduct or there has not, so if one respondent maintains there has not then the court must investigate the relevant issue in dispute.

The judge was therefore required to consider how any trial might be conducted and in particular the material which the father and sons should be permitted to adduce at that trial. He held that the father and sons were not able either to put forward a case which was inconsistent with the petition (because, their points of defence having been struck out, they could not now challenge the facts and matters pleaded in the petition) nor adduce any further evidence supporting their denial of unfairly prejudicial conduct. The petitioner would not be required to give disclosure in relation to the pleaded facts – as a result of the strike out, there were no issues in dispute – though the petitioner could seek disclosure from the father and sons where such disclosure would assist the case advanced in the petition. So long as the petitioner did not adduce evidence beyond his pleaded case, the father and sons would not be allowed to controvert it.

The father and sons would be permitted to argue that the facts and matters pleaded in the petition, even if all taken as proved, were not sufficient to satisfy the court that the petition was well founded. Even if they were sufficient, the father and sons could make submissions as to the appropriate form of relief. Sir Nicholas Warren reserved to the trial judge the question of whether the father and sons would be permitted to cross-examine the petitioner's witnesses, and to introduce documents for use in any permitted cross-examination.

Had the court reached a different conclusion, it could not have made an order for relief at the hearing (as requested by the petitioner) without a trial about the appropriate relief to be granted. Just as the court could not be deemed satisfied that the petition was well founded, it is required properly to consider what order is appropriate to remedy the unfair prejudice.