A High Court judgement provides a clear illustration of the complex interplay arising between two key shareholder remedies in UK company law, specifically the derivative claim under Part 11 of the Companies Act (CA) 2006 and the unfair prejudice petition under Section 994 of the CA 2006.
Background:
The claimant and the first defendant each hold one share in the second defendant and are its sole directors, with the first defendant primarily managing daily operations. The business of the second defendant involves the provision of domiciliary care services to local authorities (LAs), particularly through the use of migrant care workers.
The claimant alleges that the first defendant breached her duties to the company by mismanaging the finances, failing to account for a significant portion of company funds, amounting to circa £501,000 out of £1,000,000, incurring personal or family expenditures, misusing the company's Certificate of Sponsorship licence, and diverting business opportunities to her sister's company. The first defendant denies all of the allegations, arguing that the claimant's UK actions are essentially retaliatory. She claims they stem from an earlier, or concurrent, dispute in Ireland involving a different company, Minana International Ltd. (MIL), to which she alleges the claimant misappropriated over €500,000 in dividends.
The claimant has launched two concurrent legal actions: A Section 994 unfair prejudice petition against the first defendant, seeking an order for her to sell her shares, and a derivative claim on behalf of the company, based on these same alleged breaches. The core issue revolves around the claimant's ability to pursue two legal avenues for what are largely the same alleged wrongdoings by the first defendant.
Decision:
The High Court granted permission for the continuation of the derivative action. Historically, courts have often been hesitant to grant permission for a derivative claim if an alternative remedy, such as an unfair prejudice petition, is available and deemed sufficient, especially in light of the costs of a derivative claim on company funds.
The Court noted that, just because company relief can be claimed in a Section 994 petition, it doesn't necessarily mean that it must do so. Therefore, it is not automatically abusive to run both claims. While the Kimionis decision makes it easier to include company claims in Section 994, it doesn't remove the rigorous scrutiny of a derivative claim under Part 11 of the Companies Act 2006. However, a Section 994 petition might, even if a wrong was committed against the company. The derivative claim ensures the company can still pursue redress. The overlap with the Section 994 petition, albeit a relevant factor, is not conclusive.
The core test for granting permission is whether a hypothetically reasonable director, acting to promote the success of the company (as per Section 172 CA 2006), would choose to continue the claim. The Judge explicitly stated that he finds a prima facie case has been made, meaning there is sufficient merit for the claim to proceed to trial. He however rejected the need for a "mini-trial" on the underlying facts at this stage.
Implications:
This case strongly reaffirms that a shareholder is generally not required to choose between pursuing an unfair prejudice petition (for personal relief) and a derivative claim (for the company's benefit), even if the factual basis for both is largely the same. It rejects the argument that running both claims is automatically an abuse of process.
The judgement solidifies the idea that a derivative claim can serve as a vital safeguard. It allows for the direct recovery of losses by the company even if a shareholder's unfair prejudice claim were to fail (e.g., due to discretionary reasons or a finding that their personal interests were not unfairly prejudiced, despite a wrong against the company). This offers a crucial "fallback" position.
This decision emphasises that the "reasonable director" test remains paramount. The Court will rigorously assess whether continuing the derivative action genuinely promotes the success of the company, looking beyond just the immediate shareholder dispute.