When can shareholders seek relief in favour of the company alongside an unfair prejudice petition, and does the approach in Chime no longer ring true?

Key takeaways

The Court of Appeal confirmed that:

1. The Court has the power to grant relief in favour of a company in an unfair prejudice petition brought by a shareholder, if the company could have obtained that relief in proceedings it brought itself or in a derivative action in the name of the company.
2. It would be an abuse of process for an unfair prejudice petition to seek only relief in favour of the company, or if the petitioning shareholder was otherwise seen to be attempting to bypass the hurdles for derivative action under Part 11 of the Act.
3. There was a distinction between "misconduct" claims, in which a claimant sought redress for misconduct which harmed the company (properly the subject matter of a derivative claim), and "mismanagement" claims, in which a shareholder seeks to address mismanagement of the affairs of the company which is unfairly prejudicial to that shareholder. This distinction lay in the nature of the complaint and the remedy sought and would be highly fact-sensitive.
4. The position set down in the Hong Kong decision of Re Chime Corp Ltd did not represent English law - it was not just in "rare and exceptional circumstances" that relief in favour of the company could also be pursued in unfair prejudice proceedings.

Shareholders and other investors considering petitions for relief based both on unfairly prejudicial conduct and on misconduct causing loss to the relevant company should therefore consider carefully the factual basis for their claims, and the nature of the remedies they seek from the court, in order to avoid derivative claims being struck out. Similarly, corporates and directors responding to such claims may now find it more difficult to strike out a properly formulated set of claims for relief.

Background

Mr Ntzegkoutanis and Mr Kimionis were equal shareholders in a company called Coinomi Limited ("Coinomi").

Mr Ntzegkoutanis alleged that Coinomi was set up as a joint venture company for the exploitation of a cryptocurrency wallet app that he had created, with Mr Kimionis being involved for his business experience. Mr Ntzegkoutanis alleged that Mr Kimionis mismanaged Coinomi by excluding Mr Ntzegkoutanis from the management of Coinomi, and misappropriated Coinomi's assets including by transferring its intellectual property to BVI and Cypriot-incorporated companies controlled by Mr Kimionis (the "Respondent Foreign Companies").

Mr Kimionis disputed Mr Ntzegkoutanis' account, alleging that he himself conceived the app and owned all the business and intellectual property himself and then through his own company, while Mr Ntzegkoutanis was only employed as a software contractor.

Mr Ntzegkoutanis brought unfair prejudice proceedings under ss. 994-6 of the Act seeking relief in the form of:

1. an order that Mr Kimionis sell his shares in Coinomi to him, at a value reflecting the loss caused by Mr Kimionis' conduct;
2. an order that Mr Kimionis and the Respondent Foreign Companies compensate the Company for loss caused;
3. declarations of constructive trust in favour of Coinomi in respect of property held by Mr Kimionis and the Respondent Foreign Companies; and
4. in the alternative, authorisation to pursue litigation as necessary on behalf of Coinomi.

Mr Kimionis applied for strike out of relief 2 and 3, on the grounds that they sought relief in favour of Coinomi rather than Mr Ntzegkoutanis, and so should have been pursued as a derivative action under Part 11 of the Act.

At first instance, HHJ Klein (sitting as a High Court judge) granted Mr Kimionis' application. The Judge followed the principle from Re Chime Corp Ltd (2004) 7 HKCFAR 546 ("Chime") that, where relief could and would otherwise have been sought by way of a derivative action, it would be a "rare and exceptional case", in which the Court would be satisfied that the relief could nevertheless be conveniently adjudicated in an unfair prejudice petition.

Mr Ntzegkoutanis appealed on the ground that the approach in Chime was not English law and, even if it was, the Judge erred in applying the approach.

Court of Appeal decision

The Court of Appeal allowed Mr Ntzegkoutanis' appeal and dismissed Mr Kimionis' strike out application. Newey LJ gave the leading judgment, with which Whipple LJ and Snowden LJ agreed.

The boundary between derivative actions and unfair prejudice petitions

Having examined the relevant background explanatory notes to Part 11 of the Act, Newey LJ took the view that the statutory regime for derivative claims was not intended to affect unfair prejudice petitions or assimilate the two, and therefore not all claims that could be brought by or on behalf of a company had to be brought as a derivative action.

Citing Vos J in Apex Global Management Ltd v Fi Call Ltd & others¹ "sections 994-6 [of the Act] provide a wide and flexible remedy where the affairs of a company have been conducted in a manner that is unfairly prejudicial to the interests of some or all of its members… Artificial limitations should not be introduced to reduce the effective nature of the remedy introduced by sections 994-6."

While Mr Ntzegkoutanis was seeking relief that would ultimately benefit Coinomi, i.e. compensation and a declaration of a constructive trust in its favour, he was asking for it in his own capacity as a shareholder.

A petition seeking both relief for the petitioner and the company should not ordinarily be improper and the relief would not be struck out, provided that the relief sought in favour of the company could be obtained if it was brought by the company itself or in its name. Conversely, Newey LJ could not see how an unfair prejudice petition which only sought to claim relief in favour of the company could be anything except an abuse of process. However, if it could be shown that the petitioner was "genuinely interested" in obtaining relief for themselves as well as relief for the company, he did not consider that it would ordinarily be appropriate to strike out the latter even if seeking that relief would bypass the process in Part 11 of the Act to filter out inappropriate derivative claims.

Mr Ntzegkoutanis was seeking “a composite remedy” whereby Coinomi would be compensated for the loss caused by the misappropriation/the misappropriated property returned to it, and Mr Kimionis would be ordered to sell the shares in Coinomi to Mr Ntzegkoutanis. There was no reason to believe that Mr Ntzegkoutanis was not genuinely interested in obtaining the personal element of the relief and was trying to evade the hurdles in Part 11 of the Act. As such, there was no basis for strike out.

The approach in Chime

In Chime, the Hong Kong Court of Final Appeal refused to allow the petitioners to amend their petition to include orders for compensation to be paid to the company in question, finding that while the court had jurisdiction to make such an order in unfair prejudice petitions, the circumstances in which such an order should be made were "rare and exceptional". That position had been endorsed in a number of English decisions including Re Hut Group² and Taylor Goodchild Ltd v Taylor³.

The Court of Appeal held that Chime does not represent English law in that respect. The Court of Appeal did endorse the authorities on which Chime was based, in particular cases that identified a distinction between "misconduct" claims, in which a claimant sought redress for misconduct which harmed the company (properly the subject matter of a derivative claim), and "mismanagement" claims, in which a shareholder seeks to address mismanagement of the affairs of the company which is unfairly prejudicial to that shareholder.

However, the Court of Appeal recognised that the proper relationship between these two types of petition would be highly sensitive to the precise circumstances of the case, and the relief claimed, citing Millett J in Re Charnley Davies Ltd (No 2)⁴: "the distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it".

Conclusion

This decision confirms that shareholders in unfair prejudice petitioners are not confined to seeking only personal relief and clarifies the boundaries between unfair prejudice petitions and derivative actions in the Act. However, even if a petition includes both personal relief and relief of behalf of the company, a petitioner will still need to take care to show that they are genuinely interested in obtaining the personal relief and have not just included it to avoid the strict hurdles to bringing a derivative action.