Unfair prejudice or derivative action? Court of Appeal provides useful clarification

A recent Court of Appeal ruling provides guidance on the circumstances in which unfair prejudice petitions can be used to address company losses. 

Here, Senior Associate and experienced commercial litigator Matthew Moy explains what this means for shareholders.

Seeking relief

In the case of Ntzegkoutanis v Kimionis [2023] EWCA Civ 1480, the Court of Appeal considered and clarified when it is appropriate for a shareholder bringing an unfair prejudice petition to also seek relief in favour of the company to which the petition relates — in addition to the relief that the shareholder seeks to claim for themselves.

The decision restates the law in this area and provides practical guidance on when to bring an unfair prejudice petition or a derivative action. It confirms that, in certain circumstances, shareholders may be able to achieve remedies in favour of their company without first having to overcome the stringent requirements of the derivative action regime. 

Shareholder claims

Broadly speaking, shareholder claims arising from wrongful conduct fall into two main categories:

1. Unfair prejudice — section 994 of the Companies Act 2006 (CA 2006) provides for a shareholder to seek relief where the affairs of the company are being (or have been) conducted in a manner that is unfairly prejudicial to the interests of some (or all of) the shareholders.  
2. Derivative action — section 260 of the CA 2006 provides for shareholders to seek relief on behalf of the company where misconduct has caused the company to suffer a loss. The action concerns claims that are vested in the company, rather than its shareholders.

It is often the case that director misconduct has unfairly prejudiced shareholders and damaged the company — which raises the question of which procedure is more appropriate. An unfair prejudice petition is often preferred as it prioritises the shareholder’s individual interests. Conversely, a derivative action prioritises the company’s interests and is also considered to be more difficult to pursue — not least as it requires the court’s permission, which can be difficult to obtain. 

Unfair prejudice petition

Ntzegkoutanis v Kimionis concerned a company — Coinomi Limited — established by Mr Ntzegkoutanis and Mr Kimionis to develop and market a cryptocurrency wallet app. 

Mr Ntzegkoutanis alleged that Mr Kimionis had excluded him from the management of Coinomi and also misappropriated the company’s assets and business. 

He brought an unfair prejudice petition, seeking (among other things):

(i) That the misappropriated assets were held on a constructive trust for Coinomi.
(ii) An order that Mr Kimionis compensates Coinomi for losses caused by his conduct.
(iii) That Mr Kimionis sells his shares in Coinomi to Mr Ntzegkoutanis at a reduced value.

Mr Kimionis argued that (i) and (ii) sought relief on behalf of the company — rather than being relief for Mr Ntzegkoutanis as a shareholder of the company — and should be struck out. Mr Kimionis said the only way to pursue these remedies was to bring a derivative action on behalf of the company and obtain the court’s permission, which he alleged Mr Ntzegkoutanis was trying to bypass.

High Court 

The High Court granted the strike out application on the basis that (i) and (ii) should have been brought as derivative claims. The judge referred to a decision (among others) of the Hong Kong Court of Final Appeal in Re Chime Corp Ltd (2004) 7 HKCFAR 546 (cited with approval in subsequent cases in numerous commonwealth jurisdictions, including England) in which it had been said that:

“It is a rare and exceptional case which the court will permit to proceed by way of an unfair prejudice petition when it would otherwise be brought by way of a derivative claim, because [to do so] subverts the regime … which imposes limitations on bringing derivative claims”.

Mr Ntzegkoutanis did not agree and appealed. 

Court of Appeal

The Court of Appeal allowed the appeal and provided the following guidance: 

• The court has a wide discretion to do what it considers fair and equitable to correct unfair prejudice, including the award of redress to benefit the company as opposed to shareholders directly. For example, section 996(2)(c) of the CA 2006 empowers the court to authorise civil proceedings to be brought on behalf of the company. 
   
• Accordingly, the court has power to grant relief in favour of the company on an unfair prejudice petition. However, such an order should not be made unless it corresponds with an order that the company would have been entitled to had the allegations been successfully brought via a derivative claim.
   
• It is unlikely that the court will allow petitions that seek relief solely on behalf of the company (with no separate personal remedy for the shareholders). Such a petition would not be proper and the shareholder should instead seek permission to bring a derivative claim pursuant to section 260 of the CA 2006.
   
• A petition is also unlikely to be allowed if it claims personal relief and relief on behalf of the company but the shareholder does not have a genuine interest in that personal relief and is simply seeking to bring a claim on behalf of the company to bypass the process that would otherwise be applicable to what is — in reality — a derivative claim on behalf of the company. 
   

• Where — on the other hand — a petitioner seeks relief on behalf of the company and personal relief (which would not be available in a pure derivative claim, such as an order to purchase shares) and the petitioner is genuinely interested in obtaining that personal relief, striking out that petition would be inappropriate. Indeed, it might be impractical to insist on separate claims where, for example, the petitioner seeks both an order to buy or sell shares and an order for payment to the company for breach of duty. 

   

Welcome clarification

The case contains welcome clarification of the law on the relationship between unfair prejudice petitions and derivative actions and confirms that the restrictive approach in Chime will not be followed. It explains that in certain circumstances, shareholders may be able to achieve remedies in favour of their company without first having to overcome the requirements of a derivative action.

However, such relief will not always be appropriate and petitioners will need to carefully consider how to frame their case. In particular, they will need to seek personal relief as a primary basis and avoid giving the impression that pursuing a remedy for the benefit of the company via an unfair prejudice petition is an improper attempt to seek relief in favour of the company through the back door. 

If you need advice on shareholder disputes — including unfair prejudice petitions or derivative actions — talk to us.