Court of Appeal Outcome in Unfair Prejudice where A Director Pays Himself Excessive Remuneration in an Insolvent Company

Unfairly prejudicial conduct has been developed by case law, in particular, in O’Neill and Another v Phillips and Others [1999] UKHL 24 the court held that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed the affairs of the company should be conducted and that there will be cases in which equitable considerations make it unfair for those conducting the company’s affairs to rely on their strict legal powers.

The High Court in Irvine v Irvine [2006] EWHC 1875 held that where the court has to determine the appropriateness of a director’s remuneration, it should do so by reference to objective commercial criteria.

In respect to shareholders, the courts will take a wide view of prejudice suffered by a shareholder and are flexible in their approach and where a court finds unfair prejudice to have occurred, it has wide powers of relief, including the power to make buyout order for the non-controlling shareholder’s shares to be purchased by the respondents to the petition.  Whilst the Companies Act 2006 (‘CA 2006’) remains silent on how shares should be valued, the courts adopt the overriding principle that the valuation should achieve a fair result as between the parties when considering all of the circumstances of the case.

More recently, in Maidment v Attwood and Others [2012] EWCA Civ 998 a shareholder (Maidment) made a petition for relief from unfair prejudice under s994 of the CA 2006 on the grounds that:

  • The sole director of T Ltd had paid himself excessive remuneration in respect of his director’s duties in the years prior to the company going into insolvency;
  • Between 2005 and 2006, another company (E Ltd) which A was a shareholder in, used T Ltd’s trading name for no payment; and
  • Shortly before T Ltd’s insolvency, its goodwill and assets (including its trading name) were sold at an undervalue to E Ltd for £5,000.

At first instance, the Judge dismissed Maidment’s petition finding that, although the director’s remuneration had been excessive, it was not unfairly prejudicial because the payment had been disclosed in the Company’s accounts, which Maidment could have obtained a copy of by searching T Ltd’s file at Companies House, (which a member of the public has a right to do), but he had failed to do so.  In effect, a shareholder is unable to complain of an act which would otherwise have qualified as unfair prejudice if by diligence he could have found out about it earlier though taking some step.  Maidment subsequently appealed.

Decision

The Court of Appeal allowing the appeal held that the judge had been wrong to dismiss Maidment’s unfair prejudice petition and that the director had breached his duties by fixing his remuneration by reference to his own interests, contrary to his duty as a director, which subsequently amounted to unfairly prejudicial conduct under s994 CA 2006.  The fact the company was now insolvent was a complicating factor but courts take a wide view of prejudice suffered by shareholders and take a flexible approach to do what is necessary to achieve a just and fair result.  The matter is to be listed for a quantum hearing.