Unfair prejudice petitions are subject to statutory limitation periods
In THG Plc v Zedra Trust Company (Jersey) Limited [2024] EWCA Civ 158, the Court of Appeal examined the basis for that assumption and unanimously decided that:
- the Limitation Act does apply to unfair prejudice petitions;
- where the relief claimed is the payment of a sum of money, petitioners must bring their claims within 6 years; and
- where the relief claimed is some other relief, including a buyout order, petitioners must bring their claims within 12 years.
The Companies Act gives the Court a wide discretion to make “such order as it thinks fit” in the context of unfair prejudice petitions. Under the assumption that there was no limitation period, the courts regularly exercised their discretion under the Companies Act to strike out historic and stale claims. Lord Justice Snowden was at pains to emphasise that the decision in this case should not discourage judges from striking out or summarily dismissing allegations of historic conduct in appropriate cases.
The decision throws up a number of hypothetical anomalies (some of which are noted below) for legal teams to work through. While this decision has certainly surprised many, it remains to be seen whether, in practice, this dramatically changes the unfair prejudice landscape.
Background
Zedra had originally brought an unfair prejudice petition against THG and its directors. It later sought to amend its petition to add a claim for a payment from THG’s directors of equitable compensation (i.e. a payment of money) to address an alleged loss. Zedra argued that it had been excluded wrongly from a bonus share issue, and its loss was the amount it would have received for those bonus shares on the floatation of THG’s shares.
The issue for the Court of Appeal was whether, in principle, any limitation period applies to an unfair prejudice petition under section 994 of the Companies Act. If a limitation period does apply, and Zedra’s amended claims fell outside that period, then the court would be required to refuse Zedra permission to amend its petition.
The basis of unfair prejudice petitions is set out in section 994 of the Companies Act. To bring a successful petition, three requirements must be satisfied:
- the conduct complained about must be conduct of the company’s affairs;
- that conduct must prejudice the petitioner’s interest as a shareholder; and
- that conduct must be unfair.
For more information on the nature of unfair prejudice claims generally read our in-depth article on a case where a shareholder suffered unfair prejudice when company did not pursue exit.
The Court of Appeal examined the basis for the assumption that no limitation period applied to unfair prejudice petitions and found no reasoned basis for it. While the courts (including the Court of Appeal) had assumed in previous cases that no limitation period applied, the point had in fact never been fully argued. Because of that, the Court of Appeal was not bound by previous decisions that had proceeded on that assumption. It was therefore entitled to consider the issue afresh.
12 years or 6 years
The Limitation Act sets out different limitation periods for different type of claims. There are two sections of possible relevance to an unfair prejudice petition.
Section 8 of the Limitation Act states:
“Time limit for actions on a specialty.
(1) An action upon a specialty shall not be brought after the expiration of twelve years from the date on which the cause of action accrued.
(2) Subsection (1) above shall not affect any action for which a shorter period of limitation is prescribed by any other provision of this Act.”
To fall within section 8, the claim must be derived from statute; in other words, the claim must exist only because of a statute, and must not be founded in contract or a tort. Examples of claims derived from statute include:
- an action by a borrower to re-open a loan agreement as an extortionate credit bargain under section 139 Consumer Credit Act 1974; and
- an application for relief under section 423 Insolvency Act 1986 which empowers the court to unwind transactions at an undervalue that may prejudice creditors.
The ability of members of a company to petition the court for relief from unfair prejudice is set out in the Companies Act. The right does not exist outside the Companies Act. The Court of Appeal therefore found that unfair prejudice petitions are actions “upon a speciality” and are usually subject to a limitation period of 12 years.
However, section 9 of the Limitation Act states:
“Time limit for actions for sums recoverable by statute.
(1) An action to recover any sum recoverable by virtue of any enactment shall not be brought after the expiration of six years from the date on which the cause of action accrued.”
The Court of Appeal held that section 9 of the Limitation Act applies where the relief sought through the unfair prejudice petition is a sum of money (as in Zedra’s amended petition). Therefore, where the petitioner seeks the payment of a sum of money in the context of its petition, the limitation period will be 6 years rather than 12 years.
Petitioners in unfair prejudice claims typically ask the court to make a variety of orders (sometimes in the alternative). In such a case, the effect of the Court of Appeal’s judgment is that some remedies will attract a 6 year limitation period, while others will attract a 12 year limitation period.
Where allegations relate to conduct occurring 6 or more years ago, petitioners will have to give very careful thought to frame the petition, as the Court of Appeal’s judgment means that some forms of relief might be time-barred and others not.
Buyout Order
One of the most common forms of relief sought in an unfair prejudice petition is a buy-out order, where the petitioner asks the court to order the other shareholders to buy the petitioner’s shares at a fair value. Fair value typically involves the shares being valued on the hypothetical basis of factual assumptions which seek to put the petitioner back in the position it would have been in had the unfairly prejudicial conduct not occurred.
The Court of Appeal confirmed that, perhaps surprisingly, a claim for a buyout order is not a claim for the recovery of money. It is instead analogous to an order for specific performance of a contract for the sale of shares. The rationale appears to be that the petitioner will not be entitled to the purchase price until they execute a share transfer, and the situation is not strictly “an action to recover any sum” within section 9 of the Limitation Act. Where a petitioner seeks a buyout order, therefore, the limitation period will be 12 years.
Prior to this decision the courts regularly exercised their discretion under the Companies Act (to make “such order as it thinks fit”) to limit reliance on historic matters. By way of example, where the unfairness complained of by the petitioner is based on a breach of contract, the courts often deemed the unfairness waived (or too historic to rely on) where the ordinary 6 year limitation period applicable to contractual claims had elapsed.
This poses the question: what should happen when a petitioner seeks a buyout order within the 12 year limitation period but the unfairness complained of includes breaches of contract which occurred more than 6 years ago? Should the value of the petitioner’s shares be adjusted to reverse the impact of those more historic breaches of contract?
Unless and until further guidance is given by the courts in an appropriate case, the Court of Appeal’s decision will be relied on to argue that petitioners who seek buyout orders are entitled to valuation adjustments to reverse the impact of unfairly prejudicial conduct spanning a 12 year period, even where the underlying conduct complained of would otherwise attract a shorter limitation period.
Notwithstanding Lord Justice Snowden’s comments, it is also likely to be much harder for the courts at an interlocutory stage to exercise their case management powers to limit the number of issues in dispute (and therefore limit the scope of disclosure and evidence) if the conduct complained of is within the 12 year limitation period.
Often the unfairness complained of is a continuing course of conduct, and not one single event. In those types of cases, the limitation period is likely to run from the date when there are sufficient individual events which, when considered cumulatively, are sufficient to form the basis of an unfair prejudice petition.
Finally, it is worth remembering that section 32 of the Limitation Act postpones the commencement of a limitation period where the wrongdoing complained of was deliberately concealed from the petitioner.
