It is commonplace for shareholders to fall out with one another and when they do it sometimes leads to acrimonious shareholder disputes and expensive litigation.
In the case of Re Smart Diner Group Limited, in which Clarion acted for the petitioner, the High Court recently held that the relief available under an unfair prejudice petition pursuant to the wording of the Companies Act 2006 was so wide so as not to exclude compensation for wrongful dismissal.
It is open to a shareholder of a company to issue a petition directly against other shareholders for unfair prejudice pursuant to s994 of the Companies Act 2006, in circumstances where: “the Company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of members generally or some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial”.
It is also open to a shareholder of a company who has been dismissed from employment to bring employment claims against the company including for wrongful dismissal.
A claim for wrongful dismissal is a claim for breach of contract and generally concerns the relationship between a company and the employee personally. Whilst most wrongful dismissal claims are brought in the Employment Tribunal they may also be brought through the civil courts of England and Wales.
There may be circumstances where the position of a party, who is both employee and shareholder of a company, is so central to the conduct of the company’s affairs that his removal as a director and the termination of his employment might give rise to claims for both unfair prejudice and wrongful dismissal. The question then arises whether it is open to the wronged party to claim compensation for wrongful dismissal within the unfair prejudice petition or whether he must bring two separate claims.
W was the sole director and shareholder of a company which created, developed and ran an online restaurant booking facility. In 2013, this company effectively merged with another company, and W entered a service agreement with the ultimate holding company to act as its Chief Executive Officer.
In late 2013, W was dismissed as an employee of the Company and was subsequently removed as a director. W alleged that the dismissal, along with his removal as director, was groundless and constituted unfairly prejudicial conduct. He also alleged that a further grant and exercise of shares after his dismissal diluted his shareholding and that this was also unfairly prejudicial conduct.
W originally brought various claims in the Employment Tribunal including a claim for wrongful dismissal. These were later withdrawn by W although he reserved his right to pursue his wrongful dismissal claim in an alternative jurisdiction. In June 2015 W presented an unfair prejudice petition against the Company, included in which was a claim for a remedy that he be compensated for the loss arising from termination of his service agreement. The respondents to the petition applied to have this element of the claim struck out.
Mr Registrar Briggs dismissed the strike out application. Reviewing the authorities on Unfair Prejudice he noted that a shareholder’s rights in the context of a petition may be wider or greater than just his rights in his capacity as shareholder. The authorities showed that in the context of a quasi-partnership (as was the basis of W’s case) exclusion from management and breach of employment rights may be grounds for unfair prejudice.
Whilst noting that the point was novel, Registrar Briggs held that: “The Companies Act 2006 has not cut down the wide language used in respect of section 994 or the relief that may be granted by the court. The court may make any such order as it sees fit to grant relief. As the language is so wide it cannot be said in my judgment, it shuts out relief for compensation for beach of service agreement.”
Having acknowledged that W was not barred from claiming for wrongful dismissal in the context of an unfair prejudice petition, Registrar Briggs went on to comment on what W would have to establish to be successful at trial. To show unfair prejudice, W would have to show that the affairs of the Company had been conducted in such a way that was both unfair and prejudicial to the interests of members. The obvious objection to this would be that W was not pursing his claim for wrongful dismissal in his capacity as shareholder. To overcome this, W would have to show that his service agreement with the Company was both ‘a reflection of the overall relationship and the interests of the members’; in essence, that W ‘as a member and employee “formed part (and an essential part) of the arrangements entered into for the venture to be carried on” by the Company’.
In a useful reminder of the Court’s concern with case management, Registrar Briggs also stated that if the wrongful dismissal claim had been brought as a separate claim, then there could have been no objection to it being heard together with the petition that arose from the same facts. If the claim was heard in separate proceedings, it would be ‘inefficient, disproportionate, a waste of court resources and could lead to different findings of fact’.
As the court noted this was a novel point that had not previously come before the courts, at least in any reported decisions. The result confirms that relief for wrongful dismissal can be claimed in an unfair prejudice petition and should give some comfort to shareholder claimants who might previously have considered that they faced the expense of bringing two sets of proceedings for claims arising out of the same set of facts.
For any shareholders disputes or any matters relating to shareholders agreements thane please do not hesitate to contact Dominic Blakeley via firstname.lastname@example.org or on 0113 336 3365