Sunrise Radio Ltd and Another (Petitioner) v Dr Avtar Lit and Others

JurisdictionEngland & Wales
JudgeJudge Purle QC
Judgment Date13 November 2009
Neutral Citation[2009] EWHC 2893 (Ch)
Docket NumberNo 519 of 2006
CourtChancery Division
Date13 November 2009
Between:
In the Matter of Sunrise Radio Limited
And in the Matter of the Companies Act 2006 Geeta Kohli
Petitioner
and
(1) Dr Avtar Lit
(2) Ravinder Kumar Jain
(3) Surinderpal Singh Lit
(4) Sunrise Radio Limited
Respondents

[2009] EWHC 2893 (Ch)

Before:

His Honour Judge Purle QC

(sitting as a High Court Judge)

No 519 of 2006

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Mr Christopher Harris (instructed by EMW Picton Howell LLP) for the Petitioner

Mr Peter Griffiths (instructed by Penningtons Solicitors) for the Respondents

Hearing dates: 3 rd, 4 th, 5 th, 6 th, 9 th, 10 th, 11 th, 12 th, 13 th, 19 th and 20 th February 2009.

Judge Purle QC

Introduction and Issues

1

The Petitioner ("Ms Kohli") holds shares in the Fourth Respondent ("Sunrise") whose affairs she claims have been and continue to be conducted in a manner unfairly prejudicial to her. She seeks relief from unfair prejudice under section 994 of the Companies Act 2006.

2

Section 994(1) provides as follows:

"(1) A member of a company may apply to the court by petition for an order under this Part on the ground—

(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial."

3

The general approach of the Court towards an unfair prejudice petition is now reasonably well established on the authorities, and was not a matter of great controversy before me: see, generally Saul D Harrison & Son plc [1995] 1 BCLC 14, especially at 17b-20b, and O'Neill v Phillips [1999] 1 WLR 1092, especially at 1098d-1102f.

4

There must be both prejudice and unfairness. Prejudice will most often be established by reference to conduct having a depressive effect (actual or threatened) on the value of the petitioner's shareholding, which will in most cases be a minority holding, typically in a private company with restrictions on transfer. Unfairness, in turn, most often connotes some breach of the articles, statute, or general principles of company law. However, the operation of the section is not necessarily limited to such cases. The test is an objective one. There may be mutual understandings between shareholders giving rise to special rights of a quasi-partnership kind. Even without that, the conduct of the company's directors may, whether by reason of malevolence, crass stupidity, or something in between, fall so far short of the standards to be expected of them as to lead to the conclusion that the petitioning shareholder cannot reasonably be expected to have the minimum of trust and confidence in the integrity or basic competence of the board that any shareholder is entitled ordinarily to expect. This is so irrespective of any impact on the value of his or her shares, and irrespective of whether any specific breach of the articles, statute, or the general principles of company law is involved.

5

Companies are nowadays regulated to such an extent that many of the requisite standards of behaviour have a statutory foundation. (This is apart from the statutory enactment of directors' duties introduced by the Companies Act 2006, which has no impact in this case as the relevant provisions were not in force at the material times.) This is particularly so when considering the amount and frequency of information which should be made available to shareholders and other members of the public. Companies are required to lay annual accounts before their shareholders. Accounts, annual returns, and details of share allotments, changes of officers, and special resolutions, have to be filed with the registrar of companies so as to become publicly available. Strict time limits are laid down, with appropriate sanctions for default. The contents of company accounts are also subject to detailed statutory requirements, likewise backed by sanctions. The requirements vary according to the nature, status and size of the company in question. The freedom of directors to act as they wish is also circumscribed by statute in some significant respects, requiring them (for example) to renew at regular intervals their powers of allotment from the shareholders, and to obtain shareholder approval before entering into significant property transactions with one of their number. In addition, the memorandum and articles of association of a company generally contain limitations and conditions which can all too easily be overlooked.

6

Being a director is not an easy matter, and requires a responsible approach. The degree of regulation can catch even the most sophisticated of directors unawares, and most directors do not have the requisite level of sophistication and skill to cope unaided with the extensive statutory framework to which they are subject, or the niceties of the company's constitution. Many become directors of companies to take advantage of limited liability, so as to exploit their entrepreneurial skills and instincts, and may not be temperamentally suited to statutory control or constitutional restraint. There is a strong public interest in encouraging entrepeneurial activity. There is equally a strong public interest in combating abuse which limited liability too often engenders.

7

It is with such considerations in mind that the principle has evolved that in judging the issue of unfair prejudice, isolated trivial complaints, even when in breach of some legal requirement, having no impact on the value of the petitioner's shares, or upon any realistic objective assessment of the integrity and competence of the board, will not be visited by the threat of an unfair prejudice petition, but should be left to be dealt with by the regime of sanctions and other remedies the law provides. Likewise, irregularities are more likely to be ignored if the outcome would have been no different if the directors had scrupulously observed their duties, or the constitution (see, for example, Rock (Nominees) Ltd v RCO Holdings Plc [2003] 2 BCLC 493, paras 139–141, upheld on appeal at [2004] 1 BCLC 439). There is nothing new in this. As Lindley LJ observed in Browne v La Trinidad (1887) 37 Chancery Division 1 at page 17:

"I think it is most important that the Court will hold fast to the rule upon which it has always acted, not to interfere for the purpose of forcing companies to conduct their business according to the strictest rules where the irregularity complained of can be set right at any moment."

8

Nevertheless, the Court has to have some rational starting point before embarking upon the determination of what is, or is not, unfair prejudice. In Saul D. Harrison, Hoffmannn LJ rejected the proposition that the "reasonable company watcher" should set the relevant standard in any given case, adding that it was more useful to examine the factors which the law actually takes into account in setting the standard. The factors which the law takes into account include the requirements of statute and the company's constitution, and departures from those requirements have the potential to found a complaint of unfair prejudice if the Court concludes that the departures are sufficiently serious (which will more likely be so in the case of repeated defaults) to undermine trust and confidence in the board, even though there are no enduring adverse financial consequences for the shareholder in question, and even though a particular omitted requirement (for example, to seek shareholder approval) would have been a mere formality. Where, moreover, statute or the constitution lay down absolute standards, not dependent on impropriety or even negligence, the Court should respect those standards, which are there for a purpose, and not be too ready to dismiss anything other than minor, inadvertent departures as "trivial".

9

The point I have made can be illustrated by reference to section 994(1)(A) of the Companies Act 2006, introduced by the Statutory Auditors and Third Country Auditors Regulations 2007 (regulation 42) with effect from 6 th April 2008. That provides:—

"(1A) For the purposes of subsection (1)(a), a removal of the company's auditor from office—

(a) on grounds of divergence of opinions on accounting treatments or audit procedures, or

(b) on any other improper grounds,

shall be treated as being unfairly prejudicial to the interests of some part of the company's members."

10

Thus, there can (and, in the case specified in section 994(1)(A), must) be a finding of unfair prejudice even though the effect of the conduct complained of has no necessary impact on the value of the complaining shareholders' investment. Moreover, a board acting in good faith may genuinely, and correctly, disagree with (say) the accounting treatments, but removal of the auditor on those grounds will be unfairly prejudicial, reflecting the importance the law attaches to absolute standards of behaviour in the accounting process. Whilst this particular provision is new, I regard it as declaratory (except as to its mandatory application) of the kind of conduct that can amount to unfair prejudice, both today, and in a case concerning events before 2008, as this case does. Having said that, it does not follow, even where unfair prejudice is established, that the Court will necessarily grant relief. There will be cases where the Court concludes that the unfair prejudice is not sufficiently serious to justify its intervention, or its intervention may be limited.

11

I make these observations because the submissions in this case have ranged between two extremes. On the one hand, Mr Harris for Ms Kohli has portrayed most if not all of the conduct of which Ms Kohli complains as deliberately designed to harm her, which is an...

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