There are three possible courses of action in this situation. These are:

Derivative action
A derivative action is brought under common law by a member on behalf of a company in respect of a wrong done to that company. Remedies awarded are for the benefit of the company.

Derivative actions are an option where the company itself could sue and there has been a fraud on the minority, illegality or a failure to approve a matter by the members passing an appropriate resolution. A general wrongdoing will suffice as fraud.

Such actions are brought at the court's discretion and are considered difficult to bring. However, the Company Law Reform Bill proposes a statutory derivative action which should be easier to raise.

Unfair prejudice
Another option is an application under section 459 of the Companies Act 1985 on the grounds that a company's affairs are being conducted in a manner which is unfairly prejudicial to the interests of some or all of its members.

Unfairness is assessed objectively, usually from a start-point of whether the conduct is in breach of the articles of association. Prejudice is a wide concept, encompassing conduct which has damaged the value of the petitioner's holding and their exclusion from major company decisions.

The usual remedy is an order that the petitioner's shares be purchased by the company with the court directing the basis of valuation. It may also make directions for the regulation of the company.

Winding up the company under the Insolvency Act
A shareholder may also bring a claim under section 122 of the Insolvency Act 1986 for the company to be wound up on the basis that it is "just and equitable" to do so. However, a claim under section 122 is a very drastic measure and so should not be taken lightly.

Malcolm Gillies is a partner specialising in corporate finance with commercial law firm Shepherd and Wedderburn. 0141-566 7227.

Back to Search