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Unfair prejudice: an imaginative solution to a difficult problem

A recent case has again highlighted the court’s wide discretion to do what is “fair and equitable” when determining the remedy in unfair prejudice…

The recent dismissal by the Court of Appeal of the appeal in Thomas v Dawson [2015] has once again highlighted the Court’s wide discretion to do what is “fair and equitable” when determining the appropriate remedy in unfair prejudice cases.

Unfair prejudice

The Companies Act 2006 grants the right to members of a company to apply to the Court for relief because the company’s affairs are being or have been conducted in a manner which is considered to be unfairly prejudicial to the interests of some or all of the members.

The most common remedy granted by the Court in unfair prejudice cases is an order for the shares of the prejudiced member to be purchased by other members of the company on terms as the court thinks fit (mainly, and understandably, because the irretrievable breakdown of the relationship has caused the unfair prejudice). The price payable for the share purchase is often determined on the basis of expert evidence.

Facts of the case

The case of Thomas v Dawson involved two 50/50 shareholders of a quasi-partnership company which owned and ran a residential care home business. The relationship between the shareholders deteriorated and both shareholders carried out a series of unauthorised withdrawals from the business, prompting Ms Dawson to make a claim against Mr Thomas for unfair prejudice.

The judge in the High Court ordered that the business relationship between Ms Dawson and Mr Thomas must end and that Mr Thomas be granted an option to purchase Ms Dawson’s share in the company for the sum of £55,000.

Appeal

Mr Thomas appealed against the ruling to the Court of Appeal on the basis (amongst others) that the company was balance sheet insolvent and that Ms Dawson’s shares should be transferred for a price fixed by process of valuation: her share was worthless and should have been ordered to be transferred for a nominal consideration.

The Court of Appeal dismissed the appeal and Lord Justice Briggs stated that the High Court judge had found an “imaginative solution to a difficult situation” in making the order. Whilst the expert evidence showed that the company was balance sheet insolvent, there was no indication that the company was unable to pay its debts as they fell due. The judge had identified that the company had an EBITDA in excess of £100,000 per annum; the company clearly had value to Mr Thomas since he was pursuing the appeal; the company provided him with an income stream; and obtaining control of the company would allow him the whole of any future potential for improvement of the company. Consequentially, the judge had acted within the statutory jurisdiction granted to the Court.

Summary

The Companies Act grants protections for members whose rights as a member of a company have been prejudiced by the actions of other members. As reiterated in the dismissal of the Thomas v Dawson appeal, the statutory jurisdiction granted to the Court is “a very wide discretion to do what is fair and equitable in all circumstances of the case, in order to cure for the future the unfair prejudice which the petitioner has suffered”; such discretion will not be constrained to the parameters of expert evidence.

If you would like to know more about unfair prejudice, or have any other corporate law queries, contact Anna Kerrane, an associate in the corporate department on 0161 214 0523 or by email to anna.kerrane@weightmans.com.