There are a number of legal remedies available in cases of misconduct within a company. The appropriate course of action will depend on the nature of the wrongdoing, the type of prejudice or breach involved, and the parties affected. This article examines the key features of unfair prejudice petitions and derivative claims, highlighting the main differences between the two in order to help company members better understand the remedies that may be available to them in particular circumstances.
Unfair Prejudice
Unfair prejudice is a remedy that is available to all company members. According to Section 994 of the Companies Act 2006, any member of a company is eligible to take court action where the company’s affairs have been, or is being conducted, in ways that is unfairly prejudicial to the member (or multiple members including the member raising the claim). This remedy is beneficial to minority shareholders within companies in defending themselves against potential abuse of power by majority shareholders or company directors.
Legally, unfair prejudice petitions are considered disputes solely between company members, excluding the company as a participant. In most cases, the company’s inclusion as a respondent is procedural, designed to legally enforce court orders related to the petition. Therefore, as it is not a directly named party within such disputes, respondents of unfair prejudice claims are not allowed to use company funds or assets to fund any stage of the unfair prejudice petition (whether they are the claimant or the respondent). This means that when faced with unfair prejudice petitions, the respondents must pay their legal costs to defend themselves; otherwise, they risk default judgment.
The conditions for unfair prejudice claims are relatively easy to prove but can prove to be quite costly for both sides of the dispute.
Derivative claim
Shareholders can utilise claims to pursue remedies for the entire company, typically targeting a director’s past, present, or future actions (or inactions). Examples include negligence, default, and the breach of their fiduciary duties.
Statutory derivative claims can be brought by the members, shareholders, or trustees of the company; essentially, anyone who has an interest in the success of the company are eligible to bring a claim.
The general legal rule is that only the company itself has the right to bring such a claim, due to it being a separate legal personality from its directors or shareholder (Salomon v Salomon); such right is also vested in the directors due to their fiduciary duties to ensure the success of the company.
If you need advice or assistance, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.