Monday 9 February 2009

UK: England and Wales: unfair prejudice and the company's affairs

Last week judgment in Oak Investment Partners XII, Ltd. Partnership v Boughtwood & Ors [2009] EWHC 176 (Ch) was given by Mr Justice Sales sitting in the Chancery Division of the High Court. The case concerned Section 994 of the Companies Act (2006), which provides that a shareholder may petition the court for relief where the company's affairs are being, or have been, conducted in a manner unfairly prejudicial to the interests of the shareholders or some of the shareholders including himself.

There is no statutory definition of the company's affairs. Whether particular acts and omissions fall within or outside the company's affairs has often troubled the courts. It has, for example, been accepted that acts occurring within a subsidiary company can be regarded as falling within the parent company for the purposes of Section 994 (see Re City Branch Group Ltd [2004] EWCA Civ 815 and note also Hawkes v Cuddy & Ors [2007] EWHC 2999 (Ch)).

The Oak case is important because of the trial judge's broad interpretation of the concept of the company's affairs. The legal framework established by Section 994 and developed by the courts was set out by Mr Justice Sales in paragraphs [8] to [16]. With regard to the company's affairs, his Lordship observed (at paras. [14] an [15]):

The precise distribution of management decision-making authority in any particular company may be a matter of chance. In some companies, the board itself may take a wider range of day-to-day management decisions than in others, where greater scope is left to the directors or employed managers acting alone. It is difficult to see why the application of section 994 should turn upon such fortuitous matters: the jurisdiction under that provision is above all a jurisdiction concerned with substance rather than form. In my view, conduct of a shareholder/director who acted in breach of fiduciary duty in the carrying on of his company's affairs (but not through use of any company organ) would be conduct capable, in principle, of attracting relief under section 994. There is often a very fine line between duties of employees engaged as senior managers of a company and the fiduciary duty of skill and care owed by a director of a company carrying out similar tasks. I can see no reason in principle why, in an appropriate case, conduct by a person employed as a senior manager in a business, even if not a director, should not be relevant to the grant of relief under section 994. Moreover, the cases on mismanagement of a company's affairs ... contemplate that complaint may be made under section 994 even if the mismanagement is not the product of business decisions taken by the board of a company, but by individual directors or others.

[Counsel] submitted that there is a distinction between conduct of the affairs of a company falling within section 994 and conduct "dehors the company", which does not. He referred to an example given by Harman J of a director who steals from a safe, in Re a Company (1761 of 1986) [1987] BCLC 141, at 148. In broad terms, I accept the distinction (although I would wish to reserve my position in relation to the particular example given by Harman J; it seems to me a great deal may depend on the facts: if mismanagement by a director in breach of his duty of skill and care may found a petition under section 994, I have difficulty in seeing why a director's theft from his company in breach of his fiduciary duty may not). Conduct of anyone involved in a company may be so far removed from actually carrying on the affairs of the company that it does not amount to the conduct of the company's affairs for the purposes of section 994. But in my view, section 994 is concerned with the practical reality which obtains on the ground in relation to the conduct of a company's affairs, and there is no sound reason to exclude the possibility that what someone does in exercising or purporting to exercise managerial powers as a director or senior employee should not in principle qualify as conduct of the affairs of a company for the purposes of that provision".

Update (10 February 2009): The judgment has been reported by the ICLR as part of its WLR(D) service: see here. This summary will be removed from the ICLR website should the case be reported in one of the ICLR's series of law reports.

No comments: