Can you get judgment early in an unfair prejudice petition?
Are you a shareholder feeling sidelined by your company’s management? The Companies Act 2006 offers a lifeline through an unfair prejudice petition which enables shareholders to seek court intervention when their interests are unfairly harmed. However, navigating this path isn’t straightforward. A recent case demonstrates the complexities of seeking an early judgment in such petitions. Despite having a strong case, the court considered that a full trial was crucial.
The principles
Shareholders who believe that the company is being managed in a way that unfairly harms their interests or those of a specific group of shareholders can seek intervention by way of an unfair prejudice petition under section 994 of the Companies Act 2006. This section provides a legal basis for shareholders to request that the court address situations where the company’s actions are prejudicial. The court has a famously wide discretion under this provision to address such wrongdoing; in essence the court can make any order to regulate the affairs of the company.
Summary judgment is a process of obtaining a court judgment without a full trial. This involves making an application to the court and persuading the judge that the other party has no real prospect of succeeding with their case, and there is no compelling reason why the case should proceed to trial.
The case
The court has recently given guidance on the availability of summary judgment in the context of unfair prejudice petitions in Mohammed Saleem Khawaja v Stela Stefanova and 2 others [2024] EWHC 1858 (Ch).
In this case, the petitioner, Mr Khawaja first succeeded in separate proceedings where he had sought to enforce a promise made by Ms Stefanova to make him a shareholder in a company. At that trial, Ms Khawaja was found to lack credibility as a witness. She contradicted her pleaded case and casually abandoned elements of her case. She also brought a counter claim for damages which was described by the judge as a “pure invention”.
After the case, Mr Khawaja obtained an order seeking disclosure of the bank statements over which Ms Stefanova was a signatory. This order was ignored. A non-party disclosure order was then obtained against the bank. The bank statements disclosed contained certain transactions that Mr Khawaja deemed suspicious, and so he successfully obtained a freezing order against Ms Stefanova. She breached that order, and as a result she was given an 8-month prison sentence for contempt, suspended on condition that she supplied the bank statements she had previously been ordered to provide.
Mr Khawaja then issued an unfair prejudice petition alleging that the disclosure of the bank statements revealed transactions from the company to Ms Stefanova for her benefit (such as the payment of legal costs in other proceedings she was involved in, the purchase of an expensive car, the allegedly unlawful payment of a dividend only to her and the purchase of a handbag).
Mr Khawaja alleged that these payments were made in breach of duties owed by Ms Stefanova to the company. He also alleged that she had incorporated another company and diverted all of the business of the company to it (both companies became parties to the petition).
Mr Khawaja then issued an application for summary judgment on most (but not all) of the points of his petition.
The court observed that his case was inherently strong but still refused to give summary judgment. The court did so on two bases: –
- That even though the factual matrix appeared to weigh against Ms Stefanova there were still issues of fact that needed to be determined at trial;
- The factual findings would play heavily into the appropriate remedy and the only person able to make that holistic determination was the trial judge, who would be able to assess all of the evidence and tailor remedies to suit. The judge on the application felt that she could not make that determination in isolation or on a piecemeal basis.
The judge made this determination despite the fact that Ms Stefanova had admitted that some (but not all) of the payments made to her were improper. However, the judge indicated that the remedy to that admission had to still be tailored to suit the overall finding at trial.
Closing observations
This case highlights the real difficulties involved in trying to dispose of an unfair prejudice petition without a full trial. This is because such claims are heavily fact sensitive and there are a wide-range of diverse remedies open to the court if an unfair prejudice petition is successful. Summary judgment would therefore only be available in a rare case where the allegedly unlawful conduct was blatant, and the appropriate remedy obvious.
Therefore, handling an unfair prejudice petition can be a complex and protracted process. A disgruntled shareholder should only embark on an unfair prejudice petition if they are committed to taking it to trial. It should not be assumed that the case can be disposed of early, unless a settlement can be achieved. The court is likely to encourage (and may even mandate) the parties to engage in settlement discussions, but there can be no guarantees that the other party would engage in those discussions sensibly, or that the parties could reach an agreed settlement.
If you face any of these issues and need advice and support, then please contact Peter Brewer of Clarke Willmott LLP.
