Unfair Prejudice Petitions can serve as an invaluable tool for shareholders seeking redress when they perceive actions taken by their co-shareholders/directors to be detrimental to their interests. However, the recent decision in Re HLHP Oriental Food Ltd [2024] EWHC 497 (Ch) is an important reminder of the vital – and most basic - due diligence that should be undertaken before an individual brings a petition on the basis of unfair prejudice pursuant to section 994 of the Companies Act 2006 (CA 2006).
Unfair prejudice petitions
Under section 994(1) CA 2006, a "member" may apply for an Unfair Prejudice Petition if:
- the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some parts of its members; or
- an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
Additionally, section 994(2) CA 2006 extends the right to petition to those who are not a "member" but "to whom shares in the company have been transferred or transmitted by operation of law".
The case of Re HLHP Oriental Food Ltd
The significance of the wording of the relevant parts of the Companies Act 2006 came to the forefront in the recent case of Re HLHP Oriental Food Ltd, where the parties discovered, imminently before trial of an Unfair Prejudice Petition, that the Petitioners were not named on either of the Respondent companies' register of members, nor were there any stock transfer forms in existence to evidence an intention to transfer to them the shares they had purported to own. Therefore, by virtue of the definitions under sections 994(1) and 994(2), the Petitioners did not have standing to bring their Unfair Prejudice Petition against the Respondent companies.
It transpired, in fact, that the relevant registers of members had been included within the Petitioners' disclosure, albeit within a sub-group of documents, but had only come to the attention of the parties shortly before the trial of the Petition was listed to begin.
As a result of this discovery, on the first day of trial of the Unfair Prejudice Petitions, two applications were presented before Mr Justice Zacaroli. The first was an application by the respondents for permission to withdraw admissions made in the Defence that the Petitioners were members of the Respondent companies. The second was an application brought by the Petitioners for a declaration as to who the legal owners were of the shares in the Respondent companies and a rectification of the relevant registers of members.
Zacaroli J's judgment highlights two critical aspects of an Unfair Prejudice Petition:
- The burden is on the Petitioner to establish they have standing to bring an Unfair Prejudice Petition. When preparing their petition, the Petitioners should have, but failed to, consider how they would establish they were entitled to petition in the first place. The registers of members had at all times been in their possession; however they had overlooked their contents, which contradicted their claims of membership [26].
- The court must be satisfied that the Petitioners have standing with regard to the 'gateway' requirements that a Petitioner must fall within s 994(1) or (2) CA 2006. Therefore, irrespective of the fact the Respondents conceded in their Defence that they believed (erroneously) the Petitioners to be members, the court must independently verify that the Petitioners have such standing [28].
Zacoroli J allowed the Respondents to amend points of their Defence in order to withdraw the admissions in relation to the Petitioners' shareholdings.
Zacoroli J refused to provide permission, however, for the Petitioners to apply to rectify the registers of members of the Respondent companies on a number of grounds, including (but not limited to) that:
- It was not sufficient for the Petitioners to rely on the fact that all parties had proceeded on the basis that the Petitioners held the shares (which they did not in fact hold) [42]; and
- The Petitioners' case as to when and how they acquired the shares was inadequately particularised, and in some instances entirely contradictory [43-45].
Concluding thoughts
As a result of the above, the trial had to be adjourned: Zacoroli J warned in their judgment that it may in fact not be possible to resolve the issues surrounding the registers and respective shareholdings until a dissolved entity had been restored (which might in turn require the involvement of the Treasury Solicitor and take months). Re HLHP Oriental Food Ltd is accordingly a useful cautionary tale for potential Petitioners who have concerns over unfair prejudice, but perhaps have been operating in a relatively informal corporate environment. It also serves as a reminder of the importance of exercising due diligence during the disclosure process and also for documents to be accurately signposted during the process to prevent critical oversights. Fundamentally, it emphasises the importance of ensuring all foundational elements are in place before embarking on legal action.