Unfair prejudice petitions: how do I prove that the prejudice is unfair?
When oral evidence is not enough – the recent case of Re Electrical Control Installations Ltd  (05 October 2021) highlights the importance of contemporaneous documentation to evidence unfairness in a successful petition under section 994 of the Companies Act 2006.
Under section 994 of the Companies Act 2006, a shareholder can apply to the court by petition for a court order on the ground that the company’s affairs are being managed in a way that is unfairly prejudicial to the interests of some or all of the shareholders or there is a proposed act or omission by the company which would be prejudicial. The court has the discretion to grant an order which may require or prevent the company from carrying out a certain act or manage the company’s future affairs.
To be successful, the shareholder must demonstrate that the conduct is both unfair and prejudicial to the interests of the affected shareholders. To be prejudicial, the conduct must be harmful or detrimental to the shareholder’s interests, for example by delaying or suspending dividends. The shareholder must also show that the conduct was unfair or inequitable.
Mr Evans was a minority shareholder of Electrical Control Installations Limited (“the Company”). He submitted a petition to the court under s 994 of the Companies Act 2006, accusing the former directors and shareholders Mr Reid, Mr Grant and Mr Nicholson of conspiring to divert business away from the Company by setting up a rival company, which unfairly prejudiced his interests as a shareholder. He claimed that they had diverted business away from the Company and excluded him from involvement in the management of the Company. He further claimed that by doing so, Mr Reid, Mr Grant and Mr Nicholson were also in breach of their duties as directors under sections 172, 174 and 175 of the Companies Act 2006.
Mr Reid, Mr Grant and Mr Nicholson did not dispute that the rival company was formed and operated in competition with the Company or that by doing so the interests of Mr Evans had been prejudiced. They did deny that the prejudice was unfair, as Mr Evans had failed to contribute substantially to the Company during its operation and ran his own business which was in competition with the Company.
The judge found that the actions of Mr Reid, Mr Grant and Mr Nicholson amounted to conduct relating to the company’s affairs to a limited extent. The judge placed great emphasis on the importance of contemporaneous evidence as a means of understanding the intentions of the parties at the time that the rival company was formed, as much of the oral evidence submitted was found to be unreliable. The judge held there was no substantial documentary evidence to support Mr Evans’ allegation that Mr Reid, Mr Grant and Mr Nicholson has conspired to divert business away from the Company or solicit any customers. They had not acted unlawfully and Mr Evans failed to demonstrate that their actions were unfairly prejudicial. In considering whether unfairness has been established, the judge held that the conduct of the petitioner was a relevant consideration and he may have breached his duties as director by running his own competing company.
The judge held that Mr Evans failed to provide sufficient evidence to prove his case and demonstrate that the conduct of the former directors and shareholders was unfairly prejudicial to his interests in the company.
If you are a director or shareholder of a company who is experiencing issues with other directors or shareholders of the company or you have been accused of mismanaging your company’s affairs by another member, please contact Morgan Rees or Rosie Milian.