Question 7 2013 Zone A
Question 7
David, Eleanor, Fiona and Gertrude are the four equal
shareholders, and only directors, of Linnet Ltd. The
company was formed in 2010. Prior to that time, the four
shareholders operated the business as a partnership.
When the business was operated as a partnership, it was
understood that
David would not interfere in the day-to-day management
of the business. As the LA3021 Company law partnership
was very profitable, David was happy with this
arrangement.
Linnet’s articles contain a provision stating that no
shareholder shall be entitled to bring proceedings under
section 994 of the Companies Act 2006. Unfortunately,
since 2012 the company’s profits have declined sharply.
David has tried to insist on having more of a say in the
running of the company. The other shareholders have
responded by removing him as a director of the company.
They have also made clear that any profits earned by the
company in the future will be paid as salary to the
remaining directors. Moreover, David’s daughter Helena,
who was working for the company, has been dismissed.
David claims this was done to punish him.
Advise David whether he could successfully bring
proceedings under section 994 of the Companies Act
2006 and, if so, what remedy the court would be likely to
give him.
, ….…………………………
The question relates to unfair prejudicial conduct and requires advising David
with regards to any rights or liabilities of his that have been breached under S.994
Part 30 CA 2006 which deals with giving redress to minority shareholders who
have been aggravated by the majority which are the remaining directors of Linnet
Ltd. In order to ascertain this, it is essential to assess the issues at hand. Once the
Company started to face losses, David urged to have an active role in Company.
He cannot bring proceedings under S.994 which is a fetter on his discretion. They
consequently removed him and decided any profit earned to remaining directors,
while removing daughter from Company.
In order for David to bring a successful petition under S.994, relevant grounds
must be satisfied, which include; the conduct of the Company’s affairs, Interests
qua member and whether the conduct of the Company was unfairly prejudicial
towards its member/members. It must be established whether he has the locus
Standi to sue. According to S.994, he holds 25% shares as a member.
The petitioner must illustrate that an unfairly prejudicial conduct arose from an
act or omission on the Company’s behalf even if the act or omission is in isolation
it may be sufficient (Re Norvabron No.2). Lloyd v Casey holds that past conduct
may also suffice. The case of Re Legal Costs Negotiators, it was held that the
conduct and acts relating to Company’s affairs must be by the organs of the
Company on its behalf and not by any individual shareholder in their private
capacity. Since Eleanor, Fiona and Gertrude did nothing in their personal capacity
rather the three of them acted as 75% shareholders on behalf of the Company, it
is highly likely that their actions amount to conduct of Company’s affairs.
David must prove that his interest qua member has been unfairly prejudiced. It
has already been established that he is a member; the next thing to assess is the
interest of his and whether it arose by virtue of him being a member. According
to Peter Gibson in Re a Company ex p Schwarcz (No.2) conduct must be ‘both
prejudicial and ‘unfairly so’. Modern case law views the scope of member’s
Question 7
David, Eleanor, Fiona and Gertrude are the four equal
shareholders, and only directors, of Linnet Ltd. The
company was formed in 2010. Prior to that time, the four
shareholders operated the business as a partnership.
When the business was operated as a partnership, it was
understood that
David would not interfere in the day-to-day management
of the business. As the LA3021 Company law partnership
was very profitable, David was happy with this
arrangement.
Linnet’s articles contain a provision stating that no
shareholder shall be entitled to bring proceedings under
section 994 of the Companies Act 2006. Unfortunately,
since 2012 the company’s profits have declined sharply.
David has tried to insist on having more of a say in the
running of the company. The other shareholders have
responded by removing him as a director of the company.
They have also made clear that any profits earned by the
company in the future will be paid as salary to the
remaining directors. Moreover, David’s daughter Helena,
who was working for the company, has been dismissed.
David claims this was done to punish him.
Advise David whether he could successfully bring
proceedings under section 994 of the Companies Act
2006 and, if so, what remedy the court would be likely to
give him.
, ….…………………………
The question relates to unfair prejudicial conduct and requires advising David
with regards to any rights or liabilities of his that have been breached under S.994
Part 30 CA 2006 which deals with giving redress to minority shareholders who
have been aggravated by the majority which are the remaining directors of Linnet
Ltd. In order to ascertain this, it is essential to assess the issues at hand. Once the
Company started to face losses, David urged to have an active role in Company.
He cannot bring proceedings under S.994 which is a fetter on his discretion. They
consequently removed him and decided any profit earned to remaining directors,
while removing daughter from Company.
In order for David to bring a successful petition under S.994, relevant grounds
must be satisfied, which include; the conduct of the Company’s affairs, Interests
qua member and whether the conduct of the Company was unfairly prejudicial
towards its member/members. It must be established whether he has the locus
Standi to sue. According to S.994, he holds 25% shares as a member.
The petitioner must illustrate that an unfairly prejudicial conduct arose from an
act or omission on the Company’s behalf even if the act or omission is in isolation
it may be sufficient (Re Norvabron No.2). Lloyd v Casey holds that past conduct
may also suffice. The case of Re Legal Costs Negotiators, it was held that the
conduct and acts relating to Company’s affairs must be by the organs of the
Company on its behalf and not by any individual shareholder in their private
capacity. Since Eleanor, Fiona and Gertrude did nothing in their personal capacity
rather the three of them acted as 75% shareholders on behalf of the Company, it
is highly likely that their actions amount to conduct of Company’s affairs.
David must prove that his interest qua member has been unfairly prejudiced. It
has already been established that he is a member; the next thing to assess is the
interest of his and whether it arose by virtue of him being a member. According
to Peter Gibson in Re a Company ex p Schwarcz (No.2) conduct must be ‘both
prejudicial and ‘unfairly so’. Modern case law views the scope of member’s
