It’s Unfair Prejudice: A Director’s Self-Serving Conduct
Once a business relationship deteriorates, how should the parties conduct themselves in their commercial dealings going forward? A recent case reminds directors of the importance of maintaining appropriate and transparent business dealings following the breakdown of personal relationships.
What amounts to ‘unfair prejudice’?
Unfair prejudice describes circumstances where the majority shareholders (who are often directors), abuse their powers to further their own interests - to the detriment of the other shareholders. It often devalues their shares and can prompt unfair prejudice claims under section 994 Companies Act 2006. In a successful claim, the court has a wide discretion to order appropriate relief – commonly it will order the other party to buy out the petitioner's shares at fair price.
In this case, the alleged ‘unfair prejudice’ against a director/shareholder was her exclusion from the running of two companies and misappropriation of assets on the part of her former partner. The companies were carried on as a quasi-partnership.
The petitioner (P) and first respondent (O) had been in a relationship for more than two decades and had two children. They also ran two businesses together and were joint directors and equal shareholders of their two companies. Unfortunately, their relationship broke down – as did their mutual trust and confidence in their business relationships.
Meanwhile, financial problems had ensued and it was decided to sell a significant company asset in an attempt to stay afloat. Then after their relationship broke down, O dealt with a company with a view to disposing of his share and P’s share in one of the companies and appointed a third party in her place as a director without properly advising her. He also made significant withdrawals without adequate explanation and secured a loan purportedly without P’s agreement. She brought a s994 claim against her ex.
The judge found on the facts that following the breakdown of their personal relationship, O primarily looked after his own interests and those of his own company (of which P played no part). O’s performance as a witness was itself revealing: unlike P, he was “less than straightforward” when giving evidence.
Furthermore, his conduct went beyond lack of information and included a misuse of the company assets in securing loans on them without P’s knowledge. All of this conduct was unfairly prejudicial to P. O was ordered to buy out P at a fair price based on a report from a valuation expert.
Key takeaway
Breakdowns in personal relationships are a fact of life but it is important that the impact does not spill over into how business dealings are handled. While it may be particularly difficult for some personalities, commercial matters must be dealt with professionally, fairly and transparently – or risk an unfair prejudice claim.
Your legal duties under company law continue notwithstanding problems in personal relationships. For specialist advice, get in touch with experienced commercial solicitors.
1Re Greenfrost Ltd; Davies v O'Keeffe [2023] EWHC 5 (Ch)
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