Business related disputes arise all the time and take a variety of forms. Often a dispute can arise between the shareholders of a company or indeed the directors. Perhaps one director has acted in such a manner that their actions have caused prejudice to the company. In that situation, what can shareholders do?

A shareholder may be entitled to bring a claim if they believe that a director's actions have damaged the company. Broadly speaking, these fall into two main categories:

  1. Unfair prejudice - Section 994 of the Companies Act 2006 (CA 2006) allows a shareholder to bring a claim for relief in cases where the company's affairs are being (or have been) unfairly prejudicial to some or all of the shareholders' interests.
  2. Derivative actions- Section 260 of the CA 2006 allows shareholders the right to bring a claim for the company's relief in cases where wrongdoing has resulted in losses for the business.

The question of which procedure is more suitable arises from the fact that, in many cases, directors' misconduct has been both unfair to shareholders and detrimental to a company. As it prioritises the individual interests of the shareholders, unfair prejudice petitions are often preferred. In contrast, a derivative action gives priority to the interests of the company and is also seen as being more difficult to enforce because it relies on the court's permission, which may not be easily obtained.

In December 2023, the Court of Appeal handed down its judgment in Ntzegkoutanis v Kimionis [2023] EWCA Civ 1480. The court has provided clear guidance on when to bring an unfair prejudice petition or a derivative action.

Background to Ntzegkoutanis v Kimionis

    Coinomi Limited ("Coinomi") was set up by Mr Ntzegkoutanis and Mr Kimionis to develop a cryptocurrency wallet app. Mr Ntzegkoutanis and Mr Kimionis were the sole shareholders and directors.

    Unfortunately, the business relationship broke down. Mr Ntzegkoutanis claimed that Mr Kimionis had breached his statutory duties by misappropriating company assets and excluding him from the management of Coinomi. Mr Ntzegkoutanis brought an unfair prejudice petition under the CA 2006, seeking the following orders:

    • For the misappropriated assets to be held in a trust for Coinomi;
    • An order for Mr Kimionis to compensate Coinomi for losses caused by his conduct; and
    • For Mr Kimionis to sell his shares in Coinomi to Mr Ntzegkoutanis at a reduced value.

    Mr Kimionis sought to strike out (1) and (2) as they amounted to remedies for Coinomi, and not Mr Ntzegkoutanis as a shareholder of Coinomi. Mr Kimionis argued that the only way these remedies could be brought were by way of a derivative action on behalf of Coinomi and not by way of an unfair prejudice petition.

    What did the court say?

    High Court

      The High Court granted the strike out application brought by Mr Kimionis on the basis that orders (1) and (2) should have been brought as a derivative action. The judge heavily relied on the decision from the Hong Kong Court of Final Appeal in Re Chime Corp Ltd (2004) 7 HKCFAR 546 in which the court observed that only in a "rare and exceptional case" would the court "permit to proceed by way of an unfair prejudice petition when it would otherwise be brought by way of a derivative claim, because [to do so] subverts the regime … which imposes limitations on bringing derivative claims”.

      Mr Ntzegkoutanis disagreed with the decision and proceeded to appeal.

      Court of Appeal

      The Court of Appeal allowed the appeal brought by Mr Ntzegkoutanis, and provided the following guidance:

      • The court has wide discretion to make any order it considers appropriate to address unfair prejudice, and this can include an order compensating the company itself as opposed to the shareholders directly.
      • Therefore, in response to a petition alleging unfair prejudice, the court may grant relief in the company's favour. However, unless the order aligns with what the company would have been entitled to had the allegations been successfully brought via a derivative claim, it is not appropriate to make such an order.
      • However, generally speaking it is unlikely that the court will grant an unfair prejudice petition which seeks relief solely on behalf of the company, with no personal remedy for the shareholders. If the shareholder is only seeking compensation from the company or does not actually have a genuine interest in any other remedies, the court will not grant the shareholder's request for compensation. In such a situation, the court would instead direct the shareholder to seek permission to bring a derivative claim pursuant to section 260 of the CA 2006.

      Takeaways

        Ntzegkoutanis v Kimionis provides clarification of the law regarding the relationship between unfair prejudice petitions and derivative actions. It clarifies that under certain conditions, shareholders might be able to obtain remedies on behalf of their business through an unfair prejudice petition, and without first needing to satisfy the prerequisites of a derivative action, but that this will usually only be possible where the unfair prejudice petition also seeks remedies for shareholders.

        If you, as a shareholder or director of a company, find yourself in dispute with your fellow shareholders or directors, please get in touch and we can provide advice on potential routes to resolution.

        Contributors

        Lucy Duff

        Senior Solicitor

        Jared Oyston

        Partner