The High Court has awarded both personal damages and repayment to the company in an unfair prejudice claim against a Coleraine company which voted to oust a founding shareholder.
The petitioner, Mr Fergus Shaw, sought relief under section 994 of the Companies Act 2006 on the grounds that the affairs of Weir Travel Limited had been conducted in such a manner as to cause unfair prejudice to him as a member of the company.
The first and second respondents, David Weir and Sharmayne Weir, were directors of the company who did not appear and were not represented.
Mr Justice Michael Humphreys found in favour of the unfair prejudice claim, awarding £110,000 in personal damages, and an order for £75,000 to be repaid to the company.
The company was incorporated on 25 June 2012 with its registered office at 26 New Row, Coleraine, Co Londonderry.
On incorporation, the statement of capital provided that there were 30,000 allotted ordinary shares, of a nominal value of £1, each of which carried identical rights in terms of voting, dividends and distributions. The initial shareholdings were recorded as 10,000 each, in the names of the petitioner, the first and the second respondent.
On 6 August 2013, a resolution was purportedly passed at a general meeting of the company to reduce its issued share capital from £30,000 to £100, on the grounds that the company “should have been established with 100 ordinary shares valued at £1 each”. The resolution recorded that the first and second respondent were present at the meeting together with the company’s accountants at the time.
This resolution and the accompanying solvency statement were filed with Companies House and the reduction in share capital was registered. In the 2014 annual return, it was recorded that the shares in the company were owned by the first and second respondents at 50 shares each, with the petitioner owning no shares.
Standing to bring the action
The first question addressed by the court was whether the petitioner had the requisite standing to bring a section 994 claim given that statute requires that only a ‘member’ of a company can bring a petition.
However, the court noted that the company adopted the model articles of association contained in Table A. These provide that the company may only reduce its share capital by special resolution or otherwise in accordance with the 2006 Act. A special resolution can only be passed at an extraordinary general meeting called for that purpose and 14 days’ clear notice of such a meeting must be given to all members. Further, by section 283 of the 2006 Act, a special resolution requires a majority of not less than 75 per cent of the members.
In this case, the special resolution could only have been passed by 66.67 per cent of the members. Further, the petitioner never received any notification of the holding of an extraordinary general meeting for this purpose. The resolution was therefore held void and of no legal effect by the court.
Given that the special resolution was void, Mr Justice Humphreys declared that the petitioner was the owner of 10,000 ordinary shares in the company of a nominal value of £1, and ordered rectification of the register accordingly. Further, this cemented the petitioner’s standing to bring unfair prejudice proceedings as a member of the company.
Unfair prejudice & Fiduciary duty
A central contention under the unfair prejudice heading was that the £10,000 investment, made by the petitioner to the company, had been converted into a loan following the purported resolution reducing the share capital. The petitioner never agreed that his equity investment could be replaced by a loan to the company.
In assessing whether unfair prejudice had occurred, the court relied on Re Coroin Ltd(No. 2)  EWHC 2343 at  where Mr Justice David Richards stated:
“Prejudice will certainly encompass damage to the financial position of a member. The prejudice may be damage to the value of his shares but may also extend to other financial damage which in the circumstances of the case is bound up with his position as a member.”
The reduction in shares and equity also unfairly prejudiced the petitioner’s equal right to payment of dividends once these had been declared by the company.
The court found that the petitioner had “been denied the payment of any dividend and the first and second respondents have taken steps to denude the company of its cash reserves by the payment of such dividends and inflated salaries, to the detriment of the petitioner’s equity investment”. In the circumstances of this case, the court held that the petitioner had clearly suffered unfair prejudice.
Further, the conduct of the first and second respondents constituted multiple breaches of the fiduciary duties which they owed in their capacity as directors, pursuant to sections 171-175 of the 2006 Act. In particular, they failed to act within the company’s constitution, failed to promote the success of the company and allowed a conflict of interest to exist between their own personal financial positions and the wellbeing of the company.
Section 996(1) of the 2006 Act conveys a very wide discretion on the court. In this case the petitioner did not seek an order to purchase his shares, but instead sought to retain his equity investment in the company.
Here, this took the form of the dividends paid out to the first and second respondents, which amounted to £333,000. Given that the petitioner was the owner of an equal number of shares, £111,000 of those dividends ought to have been paid to him.
The two respondents had also been accused of inflating their own salaries in lieu of dividends in the years after the unfair prejudice proceedings were issued. The court noted that there was no claim that the petitioner himself was entitled to such a payment, but that they affected the company’s cash reserves and value.
On that basis, and “doing the best one can with the figures available”, the court ordered that the sum of £75,000 be repaid by the first and second respondents to the company as damages for breach of duty.
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