Court of Appeal refuses to strike out unfair prejudice petition seeking relief in favour of the company

The Court of Appeal has clarified that a shareholder bringing an unfair prejudice petition can seek relief in favour of the company in addition to personal relief: Ntzegkoutanis v Kimionis [2023] EWCA Civ 1480.

However, at least generally, such relief will not be granted unless it corresponds with relief to which the company would have been entitled in an action brought by or on behalf of the company (including a derivative action). Moreover, an unfair prejudice petition may be struck out as an abuse of process if the petitioner claims only relief in favour of the company or is not genuinely interested in obtaining personal relief but merely attempting to bypass the restrictions on bringing a derivative action. Otherwise, it will not generally be appropriate to strike out a petition which seeks both forms of relief.

The Court of Appeal’s decision confirms, in certain circumstances, aggrieved shareholders may be able to achieve remedies in favour of their company without first having to overcome the stringent requirements of the derivative action regime.

However, would-be petitioners will need to carefully consider the framing of their case. In particular, they will likely need to seek personal relief as a primary basis and avoid giving any impression that pursuing a remedy for the benefit of the company via section 994 is an improper attempt to achieve company redress via the back door.

Background

Mr Ntzegkoutanis and Mr Kimionis set up Coinomi Limited (Coinomi) to develop and market a cryptocurrency wallet app. The two were Coinomi’s sole shareholders and also directors of the company (although there was a dispute as to whether Mr Ntzegkoutanis remained a director).

Mr Ntzegkoutanis said that, over time, he had been excluded from the management of Coinomi by Mr Kimionis and further that Mr Kimionis had misappropriated the company’s business and assets. On this basis, Mr Ntzegkoutanis issued an unfair prejudice petition pursuant to section 994 of the Companies Act 2006 (CA 2006).

The petition sought: (1) an order for Mr Kimionis to sell his shares to Mr Ntzegkoutanis; (2) an order that Mr Kimionis compensate Coinomi for losses caused by his conduct; and (3) declarations that misappropriated assets were held on constructive trust for Coinomi.

Mr Kimionis applied to strike out (2) and (3) above as an abuse of process. He argued that since these heads of claim sought relief on behalf of the company (and in respect of causes of action properly vested in the company) the pursuit of such relief by way of unfair prejudice petition was improper.

The High Court (HHJ Klein sitting as a High Court judge) granted the strike-out application. Mr Ntzegkoutanis appealed.

Unfair prejudice petitions versus derivative claims

Unfair prejudice (or section 994) petitions provide shareholders with a means of seeking relief where the affairs of their company are being, or have been, conducted in a manner which is unfairly prejudicial to their interests. As His Honour Judge Eyre QC (as he then was) described the unfair prejudice jurisdiction in Re Hut Group Ltd [2020] EWHC 5 (Ch): “The purpose of s.994 is to provide redress in cases where the affairs of a company have been conducted in a way which is unfairly prejudicial to the interests of a shareholder as shareholder. It is concerned to address mismanagement of the affairs of the company rather than to provide redress for misconduct which has harmed the company”.

The court has a wide discretion in terms of the relief available in unfair prejudice cases. Under section 996, in Part 30 of CA 2006, the court has the power to make “such order as it thinks fit for giving relief in respect of the matters complained of”. Without prejudice to the generality of that power, that section also lists various types of relief that may be ordered. These include, for example, regulating the conduct of the company’s affairs in the future, requiring the company to do or refrain from doing certain acts, authorising derivative actions in the name of the company, and providing for the purchase of the shares of any members of the company by other members or by the company itself.

Derivative actions, by contrast, concern claims which are vested in the company, rather than its shareholders. They are governed by Part 11 of CA 2006, which states (at section 260) that they may be brought by shareholders “seeking relief on behalf of the company” in respect of “a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company”. Court permission is required before a derivative action can be pursued. The courts adopt a strict approach to the granting of such permission, including requiring evidence that the claim is in the best interests of the company and that it is brought in good faith and not for an ulterior motive.

For some recent examples of the challenges associated with pursuing derivative claims, see our blog posts on ClientEarth v Shell plc and McGaughey v Universities Superannuation Scheme.

Decision

The Court of Appeal (Newey, Snowden and Whipple LJJ) allowed the appeal and dismissed the strike-out application. Newey LJ gave the leading judgment.

Mr Ntzegkoutanis argued that Klein J had erred in his rigid interpretation of the forms of relief available in unfair prejudice petitions. In particular, he said the judge had been wrong to apply principles deriving from a decision of the Hong Kong Court of Final Appeal in Re Chime Corp Ltd (2004) 7 HKCFAR 546, in which it had been said that: “It is a rare and exceptional case which the court will permit to proceed by way of unfair prejudice petition when it would otherwise be brought by way of a derivative claim…”.

In Newey LJ’s view (with which both Snowden LJ and Whipple LJ agreed) the codification of derivative actions by virtue of CA 2006, Part 11 was not intended to alter the court’s jurisdiction in respect of unfair prejudice petitions (which had existed on a statutory footing prior to CA 2006). The two regimes did not (materially) cross-refer to each other and there were no other indications that one Part was meant to limit the other’s application.

Having considered the relevant authorities (and rejected Re Chime as properly representing the law in this jurisdiction), Newey LJ summarised the relevant legal principles as follows:

• The court has the power to grant relief in the company’s favour on an unfair prejudice petition.
• However, at least generally, such an order should not be made unless it corresponds with an order to which the company would have been entitled had the relevant allegations been successfully prosecuted in a derivative action, or an action by the company itself.
• An unfair prejudice petition can potentially be struck out as an abuse of process if the petitioner claims only relief in favour of the company, or is not genuinely interested in obtaining personal relief but is merely attempting to bypass the restrictions on bringing a derivative action.
• Conversely, where a petitioner seeks both relief in the company’s favour and (personal) relief which would not be available in a pure derivative claim (and the petitioner appears genuinely to be interested in obtaining the latter rather than seeking to evade the requirements of Part 11), striking out the petition or any part of the relief sought would be inappropriate. It would make little practical sense to require the petitioner to pursue those separate forms of relief via separate proceedings. Indeed, as noted in Hut Group, “the same acts can be both mismanagement which is unfairly prejudicial to a minority shareholder and misconduct in breach of a director’s duties and causing harm to the company”. In Newey LJ’s view, if a petitioner considers, for example, that facts could warrant a share purchase order (as available under section 996 of CA 2006) or, failing that, at least the grant of relief in favour of the company, it would not be improper to claim both in an unfair prejudice petition.
• Where relief in favour of the company is claimed in parallel to relief only available in unfair prejudice proceedings, case management issues will need to be addressed. It may be that all the issues can be dealt with concurrently in a single hearing. However, depending on the circumstances, it may be desirable to defer matters relating to relief in favour of the company either in whole or in part.

On the facts, Mr Ntzegkoutanis’ petition sought relief in favour of the company, but he had also sought personal remedies in his capacity as shareholder of Coinomi. There was also no reason to believe that he was not genuinely interested in obtaining an order allowing him to buy Mr Kimionis’s shares and was therefore simply trying to bypass the derivative action regime under Part 11 to achieve financial compensation for the company.

The Court of Appeal considered on that basis that he was entitled to pursue both forms of relief in his petition and Part 11 did not preclude him from doing so.