Chapter 6CompaniesRelief from unfair prejudice
Under s 994 any member may petition the court on the
grounds that the affairs of the company are being con-
ducted in a manner which is unfairly prejudicial to the
interests of its members generally or of some part of its
members (including the petitioner himself ) or that any
actual or proposed act is so unfairly prejudicial.
Note: the CA 2006, ss 994 –998 merely restatethe for-
mer rules in the Companies Act 1985.
A summary of the main points arising from case law
and other sources appears below.
Unfair prejudice
The circumstances leading to ‘unfair prejudice’, accord-
ing to the Jenkins Committee, which was set up to con-
sider company law reform and reported in 1962, were as
follows:
1 Directors paying themselves excessive salaries, thus
depriving members who are not directors of any dividends
or of adequate dividends.
This was the scenario in Re Sam Weller(1989) and
the High Court decided that minority shareholders whose
only income from the company was dividends could be
regarded as unfairly prejudiced under what is now s 994
by low dividend payments.
2 Refusal of the board of a private company to put
the personal representatives of a deceased shareholder
on the register, thus preventing the shares from being
voted and leading sometimes to the personal represent-
atives selling the shares to the directors at an inadequate
price.
3 The issue of shares to directors on advantageous
terms.
4 The refusal by the board to recommend payment of
dividends on non-cumulative preference shares held by
a minority.
It may also be that negligent mismanagement by the
directors causing loss to the company is unfairly pre-
judicial conduct, though this is as yet uncertain in view
of the absence of definitive case law.
According to the court in Re a Company(1983), it is
not unfairly prejudicial for the directors to refuse to
purchase the company’s shares under s 162. In that case
the executors of a deceased shareholder in a private
company wanted to cash in the shares to provide a trust
fund for the education and maintenance of the deceased
shareholder’s minor children. This fund would have
177yielded more than the company was paying in dividends
on the shares. In the event the directors would not buy
the shares, though they were prepared to approve a sale
to an outsider if one could be found. This conduct was
not unfairly prejudicial, said the court.
However, it seems that removal from the board as in
Ebrahimi vWestbourne Galleries(1972), or other exclu-
sion from management, is covered. This has, in fact,
been the basis of the majority of cases brought under the
section since it came into law. The section talks about
conduct unfairly prejudicial to the interests of some
part of the members, and in a private company a sub-
stantial shareholder can expect to be a director: it is an
interest of his membership.
The court said that this was the case in Re London
School of Electronics(1985) where a director was excluded
from management. The court made an order for the
purchase of his shares by the majority shareholders.
Thus he got his capital out and could go into another
business. It will be seen that this is a better remedy than
Westbourne, i.e. winding-up under the just and equit-
able ground. The person excluded from management
gets his capital out without the need to wind up a solvent
company when the directors have merely fallen out with
each other.
Nevertheless, it was held in Re a Company (No 001363
of 1988)(1989) that a petition for winding-up on the
just and equitable ground can still be made if that is the
petitioner’s choice.
Finally, it should be noted that the House of Lords
ruled in O’Neill vPhillips(1999) that, provided a mem-
ber of a company has not been excluded from manage-
ment as a director, he cannot demand that his shares be
purchased under s 994 simply because he feels that the
company is not being managed properly. The decision
makes clear that the new s 994 remedy is not a ‘cure-all’
for shareholders who, for a variety of reasons, are not
satisfied with the way in which a company is being
run. This is particularly true where they are also in
management.
Relief available
Section 996 gives the court a power to make any order it
sees fit to relieve the unfair prejudice, including in par-
ticular the following:1 Order to regulate the future conductof the com-
pany’s affairs. This could include the making of a court
order altering the articles as in the following case de-
cided under earlier minority protection law.