A judgment of the English High Court released last week and dealing with the important interrelation between derivative actions and unfair prejudice petitions will be of keen interest to onshore and offshore practitioners alike.
In Zedra Trust Company (Jersey) Ltd v The Hut Group Ltd and Ors, a shareholder (which was a trust company) brought a winding up petition alleging that those in control of the respondent company had, following a breakdown in relations, conducted the affairs of that company vindictively and for the purposes of causing harm to the Petitioner and one of its beneficiaries. That improper conduct is said to have been manifested in actions in relation to the rights of shares held by the Petitioner; in a dilution to the Petitioner’s shareholding in the respondent company by alternation of the Articles of Association; and in breaches of an obligation to provide information which is alleged to derive from a Shareholders’ Agreement.
The question frequently arises in such cases as to whether the petition circumvents the more appropriate remedy of a derivative action. Mr Justice Eyre QC analysed the English authorities at length, and in particular Re Charnley Davies Ltd (No2) in which Millett J notably explained the position in the following graphic terms:
“ ..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. It is a matter of perspective. The metaphor is not a supermarket trolley but a hologram”.
The Judge held that in this instance the petition was not a concealed derivative claim and stated that conduct which is a breach of director’s duty to a company can be the basis for an unfair prejudice petition.
The application before the Court on this occasion was a strike-out application by the respondents. The Judge carefully analysed the principles on which such a petition or particular allegations within it may be struck out. He held that a petition should only be struck out if the prospect of the relief sought being granted at a trial is “perfectly hopeless”. He also considered the requirements of pleading allegations of bad faith, citing the decision of the Court of Appeal in Three Rivers DC v Bank of England (No3).
On the facts of this case, the respondents’ application to strike out the petition failed.