SHAREHOLDERS REMEDIES [1997] EWLC 246(4) (24 October 1997)

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4.1 In the consultation paper, we canvassed a number of other reforms relating to proceedings under sections 459-461. (1) These ranged from fairly major changes to the wording of the sections to relatively minor procedural matters. Although all of these may be regarded as seeking to rationalise proceedings under the sections, some were more obviously directed at limiting the difficulties caused by the wide ranging nature of the remedy, while others addressed potential or perceived lacunae in the remedy.

4.2 We set out in this part our views on these options in the light of the responses received. First we consider amendments to the wording of section 459, and clarification of its scope by other means; then we consider the imposition of a limitation period; next we consider adding winding up to the relief available under section 461; we then look at two procedural aspects of proceedings - the power to determine relief as between respondents, and the advertisement of petitions; finally we consider whether former members should be able to bring claims under the sections.

Amendments to wording of section 459

4.3 In the consultation paper, we put forward two alternatives for amending the wording of section 459. Each had a rather different purpose.

4.4 The first, which we provisionally recommended, was to make clear that it is specific conduct, rather than the affairs of the company overall, that has to be shown to be unfairly prejudicial. (2) We suggested that the relevant part of the section could read:

A member of a company may apply to the court by petition for an order under this Part on the ground that conduct within the affairs of the company is or has been unfairly prejudicial to the interests of the members generally or some part of its members (including at least himself) ...

4.5 The intention of the amendment was not to limit the conduct on which a party could rely, but to focus attention on specific conduct. We noted in the consultation paper that irrelevant or weak allegations are often made by parties to "lend ballast" to what are essentially their main grievances. (3) We considered that the proposed new wording would demonstrate that it was not every aspect of the companys affairs in the relevant period that is in issue, and so assist in reducing the number of tactical allegations made.

4.6 This proposal received a mixed reception from respondents, only half agreeing with the provisional view. Three main reasons were put forward by those who disagreed with the provisional view. First, that the amendment was, or may be, confusing. The current wording had been in existence for some time and was reasonably well understood. There would need to be a very good reason to change it. Secondly, the amendment was unnecessary; in so far as proceedings needed to be focused, this was a matter for effective case management. Thirdly, the amendment could be counter-productive and prevent the court being able to consider conduct in the round in appropriate cases.

4.7 We accept that there are a few cases where it is the cumulative effect of a number of matters arising in the running of the company which may be regarded as unfairly prejudicial to the petitioner, rather than isolated acts. Clearly, we would not want to amend the section in such a way that the court could not look at all the circumstances in an appropriate case. Nevertheless, it is apparent that in many cases there are several main grievances on which the proceedings turn, and the tendency of petitioners to include numerous peripheral allegations is detrimental to the efficient resolution of these cases. (4) However, we agree that the best way to deal with this problem is by effective case management, and we have set out above our recommendations on this point. (5) We are reluctant to recommend a change to the wording which could give rise to unforeseen problems when it has not received the whole-hearted support of those responding to the consultation paper.

4.8 Accordingly, we do not now consider that the wording of section 459 should be amended to make it clear that it is specific conduct, rather than the affairs of the company overall, that has to be shown to be unfairly prejudicial.

4.9 The second alternative for amending the wording which we considered, but provisionally rejected, was to define the words "unfairly prejudicial" in section 459. (6) The reasoning behind this suggestion was not so much to make it easier for parties to predict whether or not a claim is likely to succeed; (7) rather, it was to ensure that the section would continue to be construed broadly.

4.10 We have drawn attention above to the decision of the Court of Appeal in Saul D Harrison (8) which laid down "guidelines" for the application of the section. These may appear to limit the availability of the remedy, in cases where there is no invasion of legal rights, to situations where the shareholder has a "legitimate expectation" over and above the legal rights conferred by the companys constitution and arising out of the relationship between the shareholders which satisfies the criteria set out in Ebrahimi. (9)

4.11 In the consultation paper, we noted that it appeared to be the original intention of the Jenkins Committee (10) that conduct could be unfairly prejudicial without there being a breach of the rights belonging to the shareholder or to the company. We suggested that if such conduct could be unfairly prejudicial for the purposes of section 459 only where there was a legitimate expectation of the kind set out in Saul D Harrison, conduct which would appear to be deserving of a remedy may be left unremedied, contrary to the expectation (as we saw it) of the Jenkins Committee. (11)

4.12 However, our provisional view was that the courts will find that new situations not mentioned in Saul D Harrison are, in appropriate cases, capable of constituting unfairly prejudicial conduct. We were reluctant to suggest that section 459 should be amended to make this clear as any amendment would run the risk of introducing some other limitation into the section. We provisionally concluded, therefore, that it was preferable to keep the very general wording of the section as it now stands.

4.13 An overwhelming majority of respondents agreed with the provisional conclusion and accordingly we remain of the view that the words "unfairly prejudicial" should not be defined in section 459.

Clarification of its scope by other means

4.14 In addition, we canvassed the possibility of authoritative guidance on the application of section 459 by means other than legislation. We noted that those who are not experts in company law may have difficulty in predicting whether or not a claim under the section is likely to succeed, and put forward (without making any provisional recommendation) suggestions for ways in which guidance could be given. (12)

4.15 A majority of respondents were not in favour of authoritative guidance of this kind. Several reasons were given. One, to which we had drawn attention in the consultation paper, (13) was that guidance can become out of date and misleading. Another was that it would be impractical to give authoritative guidance on section 459 cases as they were largely fact driven. Another respondent suggested that the width of the discretion under section 459 made it undesirable to provide authoritative guidance as it would be unduly restrictive. We are persuaded that these arguments outweigh the potential benefit which could be derived from the publication of such guidance and accordingly we recommend against the provision of authoritative guidance on the application of section 459 by means other than legislation.

Imposition of limitation period on claims under the section

4.16 There is currently no limitation period for bringing claims under section 459. (14) We have already referred on several occasions to the large number of allegations made in section 459 proceedings. (15) We pointed out in the consultation paper that these frequently involve conduct going back over a number of years (16) and that the historical nature of the investigations in such cases adds to the unwelcome length and cost of the cases.

4.17 More rigorous case management should assist in dealing with this problem. (17) However, we also considered, provisionally, that there should be a limitation period on claims under section 459. This was desirable not only because it would limit the matters on which claims could be based, and therefore help to reduce the length and cost of proceedings, but also because it would produce greater certainty for businesses.

4.18 We did not make any provisional recommendation on the length of limitation period, (18) but we did express a provisional view on two other matters. First, we considered that the limitation period should run from the date when the petitioner ought reasonably to have known the relevant facts; and secondly, we considered that the court should not have discretion to permit proceedings brought outside the limitation period to continue.

4.19 We distinguished conduct which forms the basis of the claim for unfairly prejudicial conduct (to which we considered a time limit should be applied) from other "background" matters which parties may wish to refer to in order to support or refute the claim. There was an argument for prohibiting parties from adducing any matters in evidence which occurred before a certain date (eg seven years before the proceedings). This would have the advantage of reducing the age of the factual allegations in dispute and the consequential poor quality of evidence. However, we noted that this could cause injustice if a party needed to rely on older conduct to justify his more recent behaviour. It would also cause severe injustice if it prevented a party adducing evidence that the company was formed on the basis of a relationship of the kind described in Ebrahimi. (19) Accordingly we provisionally recommended that there should be no limit on the age of the allegations upon which parties can rely in section 459 proceedings.

4.20 A majority of respondents who considered the point agreed with the provisional view that there should be a limitation period on claims under section 459. Two particular points were made by those who disagreed. Firstly, several respondents expressed concern that it was difficult to define a moment in time when the relevant cause of action accrued; the earliest act or omission may not on its own be sufficient to justify a remedy, whereas a whole series would. Secondly, a number of respondents drew attention to the difficulties which would arise in respect of concealed wrongdoing.

4.21 So far as the second of these points is concerned, we do not consider that this problem is any different from that which may arise in any other situation where a potential claimant does not become aware of matters relevant to his claim until some time later. Dealing with the first point, we accept (as we did in the consultation paper) (20) that it is in the nature of the phrase "unfairly prejudicial" to include a conglomeration of allegations producing a particular consequence. However, we do not consider that this would give the court any particular difficulty in applying the limitation period; time would be taken to run from the first of such allegations on which the applicant relies. The petitioner must of course have a reasonable opportunity to recognise and consider whether the circumstances give rise to a claim (and whether to pursue it), but that is also the case with any other type of claim and we do not consider that any special considerations apply to proceedings under section 459.

4.22 Indeed, it may be said that in the interests of commercial certainty there is an argument that stricter rules should apply in the case of shareholder proceedings than some other types of civil claims. However, we are of the view that the general rules relating to the length of the limitation period and the date from which the period should run should apply. (21) Responses received on these points did not highlight any special factors applying to claims under section 459. The Law Commission is carrying out a separate project on limitation, (22) and we consider that there is no reason why the general rules which are to be recommended in due course should not apply to proceedings under section 459. (23) We therefore recommend that there should be a time limit for bringing claims under section 459, but that the length of the limitation period and the other relevant details (such as the date from which the limitation period should run) should be considered in the context of the Law Commissions current project on limitation.

4.23 The vast majority of respondents who addressed this point also agreed that there should no limit on the age of allegations of background facts (eg as to whether the company was formed as a "quasi-partnership") on which the parties can rely. We have already referred to the injustice which might arise if a party was prevented from relying on older conduct to justify his more recent behaviour, or if he was prevented from adducing evidence that the company was formed on the basis of a relationship of the kind described in Ebrahimi. (24) Accordingly, we confirm our provisional view that that there should not be a limit on the age of the allegations upon which the parties can rely in section 459 proceedings.

Adding winding up to the remedies available under section 461

4.24 Another reform option which we canvassed (although no provisional recommendation was made) was adding winding up to the remedies available under section 461. (25) Although the powers given to the court to make orders for giving relief in respect of the matters complained of in section 459 proceedings are very wide, (26) they do not include the power to order the company to be wound up. A shareholder seeking a winding up order must pursue a claim under section 122(1)(g) of the Insolvency Act 1986. Although this may be done in the same petition (27) as a claim in respect of unfairly prejudicial conduct under section 459, there are differences between the two jurisdictions which can complicate matters. (28)

4.25 We suggested that it may assist in streamlining shareholder remedies if the court was permitted to grant a winding up order on the grounds of unfairly prejudicial conduct. This would increase the range of remedies under section 461 and thus the flexibility of the courts powers to deal with shareholders problems. We also pointed out that in a number of foreign jurisdictions with similar statutory "oppression" provisions, (29) winding up is one of the remedies that can be granted. (30)

4.26 We drew attention to a number of potential objections that might be raised in respect of such an amendment. (31) First, there was the very different nature of the remedies available under section 461 from winding up; the former may be regarded as remedying difficulties arising during the course of the continuing life of the company, while the latter seeks to bring the companys very existence to an end. (32) However, we noted that this did not necessarily give the whole picture. As a result of a purchase order under section 461, some shareholders may leave the company, having sold their shares to others who continue to run the business. Exactly the same result may follow from a winding up, if some shareholders buy the business from the liquidator and continue to run it.

4.27 Secondly, the amendment might be seen as encouraging shareholders to seek winding up in proceedings under section 459. We had already drawn attention to the difficulties which could be caused to a companys business by pleading section 122(1)(g) in the alternative to section 459. Under section 127 of the Insolvency Act 1986, any disposition of the companys property made after the commencement of the winding up is void unless the court otherwise orders. The winding up is deemed to have commenced at the time of the presentation of the petition. The effect of this section is that any payments out of the companys bank account (or into an overdrawn account) after the presentation of the petition can be set aside and reclaimed by the liquidator once the company has been wound up. (33) In practice this means that as soon as a bank receives notice of a winding up petition it will freeze the companys bank accounts. (34)

4.28 It is of course open to the company, either before or after the event, to apply to the court to validate a transaction or series of transactions. Where the company is solvent, the court will generally validate a transaction which falls within the powers of the directors where there is evidence that it is necessary or expedient in the opinion of the directors in the interests of the company and the reasons given for it are ones which an intelligent and honest man could reasonably hold. (35) However, because of the potential uncertainty and disruption which could be caused to a companys business, the tactic of pleading winding up as an alternative to section 459, even where this was not an appropriate remedy, allowed the petitioner to put maximum pressure on respondents to settle the case as soon as possible.

4.29 It was to alleviate these difficulties that a practice direction was introduced in 1990 ("the 1990 Practice Direction"). (36) This has two main features. First, it seeks to discourage the practice of pleading the two sections in the alternative and states that a claim for winding up should be included "only if that is the relief which the petitioner prefers or if it is considered that it may be the only relief to which he is entitled".

4.30 Secondly, the practice direction introduced a standard form validation order in respect of payments and transactions in the ordinary course of the companys business and requires the petitioner to state in the petition whether he consents to an order in those terms. If he does, the registrar will make an order without further enquiry; if the petitioner objects, the company can make an application to the judge for an order (ex parte if urgent).

4.31 Our concern was that the policy behind this practice direction may be undermined if the proposed amendment was seen as encouraging petitioners to seek winding up under section 459. However, we pointed out that the mere availability of the remedy under section 461 need not have this effect, and suggested that it may be possible for a revised practice direction to make this clear. We also suggested that, as an additional protection, the courts leave could be required for a petitioner to apply for winding up in proceedings under section 459. This is considered further below. (37)

4.32 The third potential objection to which we drew attention was the fact that the presence of a winding up remedy in section 461 would not deter petitioners from pleading section 122(1)(g) in the alternative since there are cases that satisfy the latter test which will not satisfy the test of unfairly prejudicial conduct. (38) Thus, it would not necessarily have the effect of reducing the allegations in issue. However, we suggested that active case management was the best answer to situations where section 122(1)(g) was pleaded unnecessarily or improperly. We also suggested that a leave requirement could be considered. This is dealt with below. (39)

4.33 Although most respondents who commented did not consider that the absence of winding up from section 461 caused particular problems in practice, a majority of respondents who addressed this question considered that winding up should be added to the remedies available under section 461. Where reasons were given, they were similar to those which we gave in the consultation paper (namely the desirability of streamlining shareholder proceedings and giving the courts maximum flexibility). One respondent in particular pointed out that in the course of proceedings under section 459 facts and matters emerge, or events unwind, which make other forms of relief impractical. A petitioner may set out with no intention to seek a winding up order, but find that no-one else can buy his shares, and the only way of realising their value is on a winding up. (40)

4.34 The main reason given by several respondents for opposing the inclusion of winding up in the remedies available under section 461 was the fact that once winding up becomes a possibility, the position of creditors has to be considered. This makes the proceedings more complex and cumbersome, and means that it becomes less easy to grant adjournments to facilitate settlements. (41)

4.35 We accept that safeguards are necessary both to protect creditors and to ensure that the companys business is not disrupted unnecessarily or excessively. However, we do not consider that this gives rise to any greater difficulties than currently arise from the availability of proceedings under section 122(1)(g), and we consider that it is desirable to have a single remedy which gives the court the maximum flexibility to deal with the matters before it. Accordingly, we recommend that winding up should be added to the remedies available to a petitioner in proceedings under section 459. We now consider the details of the proposal.

Who may seek winding up under the new provision

4.36 We have drawn attention above to the differences between the jurisdictions under section 459 and section 122(1)(g). (42) One of these relates to who may present a petition. There are restrictions on members seeking winding up under section 122(1)(g) of the Insolvency Act 1986 which do not apply to proceedings under section 459. For example, a member must have been registered for 6 months before presenting a petition under section 122(1)(g). There could be a risk that a new member would get round this restriction by seeking a winding up order under the amended section 461, instead of section 122(1)(g).

4.37 However, we do not consider that there is any need to make special provision for the member to have held shares for a qualifying period in the new provision. The tests for the two sections are different (one is that there has been unfairly prejudicial conduct, the other that it is just and equitable to wind the company up) and there is no reason why the persons who can petition under each should necessarily be the same. (43) Also we consider that it would complicate the drafting of the new provision, since the definition of the person entitled to present a petition under section 459 would depend on the nature of the relief sought. Moreover, as indicated below, (44) we are proposing a requirement for leave to seek winding up under the amended section 461 so that the court would have power to refuse to allow a "new" shareholder to petition for winding up in inappropriate cases.

4.38 Accordingly, we propose that any person who is able to present a petition under section 459 (ie a "member of the company"; section 459(1)) should, prima facie, be entitled to seek a winding up order under the new provision.

The requirement for leave

4.39 As we have explained, (45) under the current law it is not uncommon for a petitioner to seek a winding up order as a means of putting pressure on the other side when it is not the relief which he prefers or is most likely to obtain. There is a real risk that a company will suffer reputational damage and loss of confidence among its suppliers and customers if an application for winding up is made unjustifiably. This risk may be increased by a new provision permitting petitioners to seek winding up under the new provision.

4.40 The 1990 Practice Direction has sought to discourage the practice of claiming winding up under section 122(1)(g) "as a matter of course" in proceedings under section 459. It could be extended so that similar discouragement was given to the practice of including a claim for winding up under the new provision. However, the practice direction does not appear to have been entirely successful, (46) and we do not consider that it would be a sufficient deterrent against claiming winding up in inappropriate cases, particularly as the new power may be seen as encouraging claims for winding up. Accordingly we recommend that a petitioner should require the courts leave to apply for winding up under sections 459-461.

4.41 We envisage that on the leave application the court would consider, for example, whether the petitioner was seeking to exert unjustified pressure on the respondents by claiming winding up, or was acting unreasonably in seeking a winding up. (47) We would stress that winding up should remain a remedy of last resort. The court would also consider whether it may be better to defer the application to a later stage when it would be clearer what the allegations were and whether winding up was a real possibility. The court could also take into account any other relevant factor. The effect of our Bill is that the court could not make a winding up order unless leave had been obtained. (48)

4.42 There is a risk that applicants will circumvent the leave requirement by seeking a winding up order under section 122(1)(g) (instead of under the new provision) in conjunction with section 459 proceedings. The current practice direction may not be effective in preventing this. Several practitioners expressed concern that petitioners were continuing to plead section 122(1)(g) in the alternative to section 459 in inappropriate cases, despite the introduction of the practice direction. We therefore consider that the proposed leave requirement should also apply to petitioners seeking winding up under section 122(1)(g) in conjunction with proceedings under section 459. This will necessitate legislation and cannot be achieved simply by changes to the Insolvency Rules. It will also render part of the 1990 Practice Direction unnecessary. We therefore recommend that a petitioner should also require the leave of the court to apply for a winding up order under section 122(1)(g) of the Insolvency Act 1986 in conjunction with an application under section 459.

Effect of presentation of petition (sections 127-129 of Insolvency Act 1986)

4.43 As indicated, we accept that where winding up is in issue, the protection of creditors and other persons dealing with a company becomes an issue. Even if the company is solvent at the start of proceedings, there is a risk that it will become insolvent on winding up due to loss of good will and going concern values attached to assets.

4.44 We propose that the safeguards set out in Part IV of the Insolvency Act 1986 in relation to the period between the commencement of the winding up and the winding up order which apply to a contributorys petition, should equally apply where winding up is sought under an amended section 461. The most important of these is section 127 which avoids dispositions of company property made after the commencement of the winding up. Other safeguards are contained in sections 126 (power for the company or a creditor or a contributory to apply to stay or restrain proceedings against the company) and 128 (avoidance of attachments). (49)

4.45 However, there is one important qualification which we consider needs to be made in respect of section 129. This section provides that winding up is deemed to commence at the time of the presentation of the petition for winding up. Where winding up is sought at the outset, this does not present any particular problem. But where a petition is amended, the amendment takes effect from the date of the original petition it amends, not from the date of the amendment. (50) Thus, where a petition is amended to include a claim for winding up, the "time of the presentation of the petition for winding up" is the original date on which the petition is presented, not the date on which the amendment is made. The combined effect of sections 127 and 129 is therefore that dispositions may be avoided in respect of the period before any claim for winding up is included in the petition. We do not consider that this is appropriate.

4.46 At present, this situation can already arise where a claim for winding up under section 122(1)(g) is added to a petition under section 459 during the course of the proceedings. To get round this problem, the courts can require a new petition to be presented. We consider that this is wasteful in terms of time and costs, and may be overlooked. We propose, therefore, that where a section 459 petition is amended, after it has been presented, to include a claim for winding up either under the new section 461 or under section 122(1)(g), the winding up should be deemed to commence at the time of the amendment, and not the time of the original presentation of the petition. No disposition will be avoided, therefore, in respect of the period before a winding up order is sought. Consistently with this, executions which occur after the petition is presented but before it is amended will not be avoided under section 128, as they would have been but for our recommendation. We therefore recommend that where a petition under section 459 is amended to include a claim for winding up (whether under section 122(1)(g) or under the new provision) the winding up should be deemed to commence from the date of the amendment.

4.47 So far as the validation of transactions after the date on which a claim for winding up is included in the petition is concerned, we consider that this is best dealt with by way of practice direction. The court will have occasion to consider that matter on the application for leave. We propose that there should be provision in a new practice direction for a standard form validation order along the lines of the one currently contained in the 1990 Practice Direction. Accordingly, we recommend that the Vice Chancellor should be invited to consider whether there should be an amended practice direction setting out a standard form validation order where winding up is sought under the new provision.

Courts decision on whether to make the order

4.48 We propose that the court should have jurisdiction to make a winding up order on a petition under section 459 on the same basis that it can make other orders; that is to say that once a claim for unfairly prejudicial conduct has been made out, the court will have a discretion as to what order (if any) to make. (51) In exercising its discretion the court is likely to consider whether any other order under section 461 or other remedy available to the petitioner is more appropriate, but we do not consider that there is any need to make express provision in this respect in the legislation. (52)

Other relevant provisions and rules

4.49 So far as the other provisions of the Insolvency Act are concerned, we recommend that, except where they are inconsistent, those provisions which apply to winding up by a contributory under section 122(1)(g) should apply to winding up under the new provision. (53) Rules can be made under section 461(6) of the Companies Act 1985 which either draw on or incorporate the relevant parts of the Insolvency Rules.

The power to determine relief as between respondents

4.50 We pointed out in the consultation paper that third party claims and contribution claims between defendants did not appear to be available in proceedings brought under section 459. (54) Although the court may be able to get around this difficulty in practice, (55) we considered provisionally that it would be desirable for the court to be given the same procedural powers as it has in a writ action to order joinder and contributions and indemnities between respondents or respondents and non-parties. (56) All but one of the respondents who considered this issue agreed with the provisional view. This anomaly may be removed when new rules of court are adopted pursuant to the Civil Procedure Act 1997. (57) Otherwise an amendment to the 1986 Rules would be needed. (58)

4.51 However, these procedural changes would still leave a gap in the substantive law. No right of contribution exists under the Civil Liability (Contribution) Act 1978 where a person is ordered to make redress (whether by purchasing the claimants shares or otherwise) and his liability arises simply by virtue of section 459. The 1978 Act only applies where parties are liable in respect of the same damage. (59) For this purpose, the person who suffered the damage must be "entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise)". (60) This would not be satisfied where relief under section 461 had been ordered solely against the person claiming contribution. Even if that difficulty did not exist, there might well be no entitlement to compensation.

4.52 However, we do not make any recommendation for the amendment of the 1978 Act for three reasons. First, it was not raised as a question for consultees. Second, the court can grant relief in such a way that those who are parties only bear their fair share of the burden of the relief in any event. (61) Thus in most cases (62) a right of contribution is unnecessary. Third, where the unfairly prejudicial conduct consists of a wrong for some other reason, for example where the respondent against whom an order to pay compensation is made and the person from whom he seeks contribution are both liable for a breach of trust which is held to constitute unfairly prejudicial conduct, rights of contribution exist under the general law.

4.53 We recommend that the Lord Chancellor consider changes to the 1986 Rules (governing unfair prejudice proceedings) so as to give the court the procedural powers to allow contribution and indemnity claims in proceedings under section 459 if this matter is not dealt with in the general rules introduced under the Civil Procedure Act 1997.

Advertisement of section 459 petitions

4.54 In the consultation paper we pointed out how damaging to a company the dissemination of the information that a petition has been filed under section 459 can be. Strictly, unlike in the case of petitions seeking winding up under section 122(1)(g), (63) the presentation of a petition under section 459 has no legal effect on the conduct of the companys business. However, even where a petition seeks relief under section 459 alone, the companys customers and creditors are likely to be wary of doing business with the company, both because of the risk that the petition might be amended and a winding up order sought, and the disruption which is likely to be caused to the company as a result of the proceedings.

4.55 When a petition is issued under section 459 the court fixes a return date at which a number of matters, including advertisement of the petition, can be considered. (64) It is inherent in the rules that no advertisement should take place unless the court directs that it should. (65) It is also now clear from the case law, that advertisement for these purposes does not simply mean advertisement in the Gazette, but any notification to an outsider of the existence of the petition. (66) There should, therefore, be no notification of the existence of a petition under section 459 to outsiders until the court has had an opportunity to consider the question of advertisement on the return day; nor indeed should there be any advertisement thereafter, except in accordance with an order of the court. In practice, it is by no means clear that this restriction is observed and we considered that it would be helpful to include an express provision to the effect that no advertisement of section 459 petitions should be allowed prior to the return date. In fact, on further consideration, we consider that the provision should be to the effect that there should be no advertisement at all except in accordance with an order of the court. This is in accordance with the current case law, and covers the situation where the court does not consider the question of advertisement on the return date. (67)

4.56 Nearly all of the respondents who addressed this point agreed with our provisional view. It was suggested by one respondent that it should also be made clear in the rules that the prohibition extends to all forms of advertisement, not just to formal advertisement. We agree that it would be useful to make the position as clear as possible. Accordingly, we recommend that the Lord Chancellor consider changes to the 1986 Rules (governing unfair prejudice proceedings) so as to include an express provision stating that no advertisement of section 459 petitions should take place except in accordance with an order of the court, and so as to confirm the meaning given by the courts to "advertisement" in this context by an appropriate definition.

4.57 At present an application can only be made under section 459 by a current member of the company. (68) We considered in the consultation paper whether the remedy ought also to be available to former members, but did not form a provisional view on this point.

4.58 Although we were unable to cite any examples of particular problems which had arisen in practice as a result of this limitation, we did set out a factual situation where it may be appropriate for a former member to bring a claim. This is where directors have made personal profits at the expense of the company and then induce a minority shareholder to leave, giving him a price for his shares which represents an under value because of their wrongdoing. (69) However, we pointed out that the former shareholder may be able to obtain a remedy by other means: for example, by proving an actionable misrepresentation; or by establishing that the directors owe him personally a duty of disclosure. (70) We also pointed out that the shareholder should be able to protect himself in most situations by obtaining appropriate covenants and warranties in any agreement to sell his shares.

4.59 We also drew attention to the risk of increased litigation if former shareholders were permitted to sue. This was particularly relevant in the context of takeover situations, where an increase in litigation might make it difficult to effect and implement a rationalisation of the acquired companys business. (71) This would be undesirable.

4.60 A majority of respondents who addressed this question considered that former members should not be permitted to bring claims under section 459. Where reasons were given, they were similar to those set out above. No respondent gave any concrete examples of where undue hardship had been caused in practice by the lack of availability of the remedy to former members. (72) We consider that any potential problems which may arise under the current law are outweighed by the disadvantages of the extension which have been highlighted above. Accordingly we recommend against permitting former members to bring claims under section 459.

Conclusion

4.61 To summarise, we remain of the view that the words "unfairly prejudicial" should not be defined in section 459, and we recommend against the provision of authoritative guidance on the application of section 459 by means other than legislation.

4.62 We consider that there should be a time limit for bringing claims under the section but see no reason why the general provisions relating to the limitation of actions should not apply. As these are currently under review in a separate Law Commission project, we make no specific recommendation in this report on the details of the limitation provisions which should apply to section 459 proceedings.

4.63 We recommend that winding up should be added to the remedies available under section 461, but should be subject to a leave requirement. (73) We also recommend that a petitioner should be required to obtain leave of the court where he seeks winding up on just and equitable grounds in conjunction with proceedings under section 459. (74)

4.64 Where a petition under section 459 is amended to include a claim for winding up (whether under the amended section 461 or section 122(1)(g)) we consider that the winding up should be deemed to commence from the date of the amendment, rather than the date of the original presentation of the petition. (75) We also recommend that consideration should be given to the introduction of an amended practice direction setting out a standard form validation order where winding up is sought under the new provision.

4.65 We consider that the courts should have in relation to proceedings under section 459 the same or similar procedural powers to allow indemnity and contribution claims as they have in relation to writ actions.

4.66 We consider that the rules on the advertisement of petitions under section 459 should be clarified so as to confirm that no advertisement of a section 459 petition is allowed without the courts leave, and so as to confirm the meaning of advertisement in this context.

4.67 Finally, we do not recommend that section 459 is amended so as to permit former members to bring proceedings under that section.

(4) See the recent case of Re Arvin & Sons Ltd [1997] 1 BCLC 479, where Sir Richard Scott V-C commented: "Judges should, to my mind, be astute to prevent section 459 petitions degenerating into an unnecessary raking over old grievances or settling of old scores"; ibid, at p 494.

(7) The Commission considered separately the question of clarification by authoritative guidance; see para 4.14 below.

(10) Report of the Company Law Committee (1962) Cmnd 1749. The Committees recommendations formed the basis for the current wording of section 459; see Consultation Paper No 142, paras 7.8-7.12.

(12) Eg leaflets drawn up by or on behalf of the DTI setting out examples from case law.

(14) Although it seems that delay in presentation of the petition may render it inequitable to grant relief under the section; see Peter Gibson J in Re D R Chemicals Ltd [1989] BCLC 383, 397-398. See also Consultation Paper No 142, para 9.3, n 11.

(18) Although where the alleged conduct amounts to an invasion of legal rights, or some duty owed to the petitioner or the company, we provisionally recommended that the period ought to be no less than that (if any) which applies to the wrong.

(21) As should those relating to whether the court should have discretion to permit proceedings brought outside the limitation period to continue; see para 4.18 above in respect of our provisional view.

(22) A consultation paper (entitled "Limitation Periods") is in the process of being drafted and is hoped to be published before the end of the year. In Scotland, the question of time limits would need to be addressed in a reform of the law of prescription.

(23) Account may need to be taken of the fact that the alleged conduct could also amount to a wrong in respect of which a limitation period already applies; see n 18 above.

(26) These include regulating the conduct of the companys affairs; requiring the company to do, or refrain from doing certain acts; authorising civil proceedings to be brought in the name and on behalf of the company; and ordering the purchase of shares; section 461(2). These specific powers are without prejudice to the terms of section 461(1) which gives the court a discretion "to make such order as it thinks fit for giving relief in respect of the matters complained of".

(27) Note, however, the Practice Direction (Ch D) (Companies Court: Contributorys Petition) [1990] 1 WLR 490 which discourages the practice of pleading the two petitions in the alternative; see para 4.29 below.

(28) In particular, facts which satisfy the test under s 459 may not necessarily satisfy the test under s 122(1)(g) and vice versa. Contrast the cases of R A Noble & Sons (Clothing) Ltd [1983] BCLC 273 and Re a Company (No 00314 of 1989), ex parte Estate Acquisition and Development Ltd [1991] BCLC 154; see Consultation Paper No 142, para 8.18, n 52. Also, the court should not make a winding up order if it is of the opinion that the petitioner has another available remedy and is unreasonably failing to pursue it; s 122(2) of the Insolvency Act 1986 and see Consultation Paper No 142, paras 8.13-8.15. No such statutory restriction applies in relation to s 459 proceedings, although similar consideration may enter into the exercise of the courts discretion to grant relief; see Consultation Paper No 142, para 8.16. Another difference relates to who may bring a petition under the two sections; see Consultation Paper No 142, paras 8.3-8.4 and 11.12-11.14.

(32) See the comments of Mummery J in Re a Company (No 00314 of 1989), ex parte Estate Acquisition and Development Ltd [1991] BCLC 154, 161.

(34) See the comments of Warner J in Re a Company (No 001363 of 1988), ex parte S-P [1989] BCLC 579, 586 and Hoffmann J in Re XYZ Ltd [1987] 1 WLR 102, 110. See also Re Doreen Boards Ltd [1996] 1 BCLC 501.

(35) See the comments of Slade J in Re Burton & Deakin Ltd [1977] 1 WLR 390, 396.

(36) Practice Direction (Ch D) (Companies Court: Contributorys Petition) [1990] 1 WLR 590. For recent consideration of this practice direction, see the cases of Re Arvin & Sons Ltd [1997] 1 BCLC 479 and Re Copeland & Craddock Ltd [1997] BCC 294. In the former, a prayer for winding up under section 122(1)(g) was struck out; in the latter an application to strike out was refused.

(40) The court may also decide that no relief is capable of being devised which would meet the justice of the case and which would be more advantageous than winding up; see Linos Antoniades v Landy Chet Kin (Re Full Cup International Trading Ltd) 5 March 1997 (unreported, Court of Appeal).

(41) Since in considering the question of adjournments, the court must look beyond the interests of the parties to those of others (in particular creditors) who may be affected.

(43) Although there may well be considerable overlap with respect to the conduct caught by both sections.

(47) Compare in the case of a petition under s 122(1)(g), s 125(2) of the Insolvency Act 1986, which provides:

If the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court, if it is of opinion

(a) that the petitioners are entitled to relief either by winding up the company or by some other means, and

(b) that in the absence of any other remedy it would be just and equitable that the company should be wound up,

shall make a winding-up order; but this does not apply if the court is also of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.

This provision would not apply to a claim for winding up under s 461, but we consider that the imposition of the leave requirement is likely to have the same effect.

(48) See clause 5(1) and 5(3). Clause 5(1) provides that a petitioner can only include a claim for winding up in the petition if the court gives leave. We consider that if a petitioner, without first obtaining leave, included in his petition a claim for winding up under s 461 of the Companies Act 1985 or (see para 4.42 below) s 122(1)(g) of the Insolvency Act 1986, the court could either strike out that part of his claim or grant leave retrospectively; see Re Saunders [1997] 3 All ER 992, in which Lindsay J declined to follow the earlier decisions at first instance in Wilson v Banner Scaffolding Ltd, The Times 22 June 1982, and Re National Employers Mutual General Insurance Association Ltd (in liquidation) [1995] 1 BCLC 232.

(49) For Scotland, the equivalent to s 128 of the Insolvency Act 1986 is s 185 of that Act which incorporates the provisions of the Bankruptcy (Scotland) Act 1985.

(50) See the notes to Order 20, r 8 (20/5-8/1) of the Supreme Court Practice (1997) vol 1, which deals with the amendment of documents generally.

(51) On the width of the courts discretion in respect of orders under s 461, see the recent case of Linos Antoniades v Landy Chet Kin (Re Full Cup International Trading Ltd) 5 March 1997 (unreported, Court of Appeal).

(53) In the draft Bill we recommend that the following sections should not apply: s 122, s 124 and s 125.

(55) By joining parties under r 2(2) of the 1986 Rules (and/or under RSC, O 15) and using its discretion to grant relief in such a way as to apportion the burden between the relevant parties. But it can only do this where the applicant makes a claim against all the respondents; cf Re Little Olympian Each-Ways Ltd (No 3) 7 October 1994 (unreported, Evans-Lombe J) where the applicants claim against the party from whom contribution was sought had been settled.

(56) Or similar powers. Alternatively the parties could be given similar rights to issue third party or contribution notices to those they would have had in a writ action under RSC, Ord 16.

(58) For Scotland, the court has a limited power to fix contributions under s 3 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940, but this power does not appear to be as broad as that available under the Civil Liability (Contributions) Act 1978.

(61) See Little Olympian Each-Ways Ltd (No 3) 7 October 1994 (unreported, Evans-Lombe J) at p 15.

(62) There is a possibility that the justice of the position as between respondents or as between respondents and non-parties may differ from that as between the claimant and the respondent. Ibid, at p 15.

(63) Under s 127 of the Insolvency Act 1986, any disposition of the companys property made after the commencement of the winding up is void unless the court otherwise orders. The winding up is deemed to have commenced at the time of the presentation of the petition. See para 4.27 above, and see Consultation Paper No 142, paras 8.19-8.21.

(65) See the comments of Roger Kaye QC, sitting as a deputy High Court Judge in Re a Company (No 002015 of 1996) [1997] 2 BCLC 1. See also Re Doreen Boards Ltd [1996] 1 BCLC 501 (which concerned a contributorys winding up petition).

(66) See Re a Company (No 002015 of 1996) [1997] 2 BCLC 1. See also Re a Company (No 00687 of 1991) [1992] BCLC 133""; Re Bill Hennessey Associates Ltd [1992] BCC 386; and Re Doreen Boards Ltd [1996] 1 BCLC 501 (which concerned contributorys petitions to wind up the company).

(68) Section 459(1) provides simply that "a member of a company" may apply. It omits any reference to former members. However, s 459(2) deals with an earlier problem regarding personal representatives by extending the section to "... a person who is not a member of a company but to whom shares in the company have been transferred or transmitted by operation of law".

(69) Ie the price reflects the reduced value of the company, and that value has only been reduced because of the directors wrongdoing. We also gave two other examples of situations where a former member may wish to bring proceedings; see Consultation Paper No 142, paras 20.35 and 20.37. See also the example set out by Marsden in "Prejudicial Relief?" (1994) 15 Co Law 178.

(70) Re Chez Nico (Restaurants) Ltd [1992] BCLC 192, 208, per Sir Nicholas Browne-Wilkinson V-C.

(71) Former shareholders are, however, given an express right to claim payments to a director on a takeover which have not been properly disclosed; see s 315 of the Companies Act 1985.

(72) On the separate question of whether a beneficial owner of shares held by nominees can present a s 459 petition, see Ennis v Murphy and another 20 June 1996 (unreported, Court of Appeal). As we pointed out in the consultation paper, we have not addressed in this project the problems which arise through shares being held by nominees; Consultation Paper No 142, para 1.10. As to the ability of a beneficial owner to compel a registered member to bring an action, see para 6.50, n 74 below.

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You are here: BAILII >> Databases >> The Law Commission >> SHAREHOLDERS REMEDIES [1997] EWLC 246(4) (24 October 1997) URL: http://www.bailii.org/ew/other/EWLC/1997/246(4).html Cite as: [1997] EWLC 246(4)