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The Court of Appeal has made an important decision that will strengthen the role of minor shareholders and potentially other Directors in many small and family run firms by striking out a lower court’s decision to dismiss a minority shareholder’s petition for relief from unfair prejudicial conduct proceedings under Companies Act 2006, s. 994.

The grounds for the claim were that the remuneration paid to the sole director of the company prior to insolvency was excessive and trading under the name of the company for no payment and undervaluing the sale of the trading name on the eve of its liquidation was a breach of duty.

Lady Justice Arden briefly describes the circumstances as follows;

1.     ‘Mr Maidment holds 25% of the issued shares of Tobian. He acquired his interest when Mr Attwood acquired a 50% holding pursuant to a share purchase agreement dated 2 March 2000. Mr Attwood agreed to hold half of those shares for Mr Maidment. Mr Attwood became a director with the other 50% shareholder; Mr S. Harris. On 28 June 2001, Mr Attwood acquired Mr Harris’ shares. Mr Harris then ceased to be a director and Mr Attwood became, and at all material times remained, the sole director of Tobian. Mr Maidment’s shares were not registered in his name until August 2002. On 29 July 2008, Mr Attwood transferred one share to the company secretary, the second respondent, Ms Nicola Heard. The business relationship turned sour in about August 2001. Tobian entered creditors’ voluntary liquidation in October 2008. The accounts for Tobian’s financial years ended 30 September 2002 to 2007 show that Mr Attwood drew large amounts of remuneration (in excess of £100,000 each year).

2.      A second issue related to use of Tobian’s trading name between 2005 and 2008 for no payment. The original trial judge’s conclusion was that this conduct, while in breach of Mr Attwood’s duty as a director, did not result in unfair prejudice because Epyc had not succeeded in doing what no doubt was Mr Attwood’s aim in its using Tobian’s trading name, namely trading profitably in this period.

3.      The third complaint related to the sale of Tobian’s trading name on the eve of its liquidation. Mr Attwood sought to defend the claim that the sale was at an undervalue on two bases. He submitted that it was the liquidator who determined the sum of £5,000 +VAT paid by Epyc for Tobian’s goodwill and assets. The judge rejected that submission on the facts. However, the judge accepted the second argument that the undervalue could not in any event exceed the amount of the deficiency in Tobian’s liquidation and thus did not amount to unfair prejudice.

According to Kate Manning, ‘the court has determined that remedy also has an important policy aim to encourage proper corporate behaviour in the management of smaller companies and building up confidence of investors in them. As such, where the company is insolvent the court must do what is necessary in that situation to achieve a just and fair result.

The Appeal Court has held that there was no basis in the statutory provisions, or in case law, for restricting the manner in which shareholders enforce the liability of directors for wrongs to their companies by imposing a requirement for diligence to read a company’s filed accounts.

In making an assessment the court will have regard to the company’s articles, applicable rights and duties conferred by statute, such as directors’ duties codified in s. 171 to 177, and equitable considerations.

Further, there is a strong deterrent element in the imposition of liability for breach of fiduciary duty and non-compliance generally indicates that unfair prejudice has occurred;

Under S. 996(1) the court has wide powers to grant relief when unfair prejudice is found. The remedy in both statute and case law is adaptable in order to enable the court to produce a just remedy where minority shareholders can show wrongdoing that prejudices their interests.’