In shareholder disputes or where a shareholder breaches its agreement, the consequences can be quite severe. There are some circumstances where their shares can be compulsorily transferred at a discounted rate, or removal of them as a shareholder. Still, the process’s details are obscure to a lot of people, with a primary concern being if a major breach would cause or warrant a compulsory share transfer.
For many shareholders, it may seem sensible to take immediate steps to remove a shareholder from the company following a serious breach, particularly where doing so could minimise further damage and reduce risk to the business. Such action would often appear to align not only with their own personal interests, but also with the best interests of the company as a whole.
However, the decision in Kulkarni v Gwent Holdings Ltd [2025] EWCA Civ 1206 suggests otherwise. The Court of Appeal held that transferring a shareholder’s shares on the basis of an alleged breach of the shareholders’ agreement, without first providing notice of the breach and an opportunity to remedy it, could amount to a fraudulent transfer.
The principle in Kulkarni v Gwent Holdings Ltd
In Kulkarni, the court held that a share transfer notice would not be valid unless the shareholder alleged to be in breach had first been served with a notice to remedy the breach, and had failed to do so within ten business days. Unless the shareholders’ agreement contains specific provisions allowing for immediate termination, shareholders must be given a reasonable opportunity to rectify the breach before any transfer of shares can lawfully take place.
Severity of the breach
A repudiatory breach is a serious contract violation that removes the core benefits for the unaffected party, making the contract effectively unperformed or unworkable. Common examples include disruptive conduct that make future cooperation impossible, refusing to perform one’s obligations (as provided for in the contract), and the breach of a fundamental contract term that would alter the outcome of performance.
However, the courts in Kulkarni recommended taking a “practical” approach to the nature and particulars of every individual breach instead of focusing on the definitions in shareholders’ agreements. This suggests that what may be classified as repudiatory breaches have a possibility of rectification or remedy in certain circumstances. If steps are taken promptly and efficiently, there is a chance that the contract can remain unchanged and that the parties can continue dealing with one another.
If you need advice or assistance, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.