Court clarifies overlap between derivative claims and unfair prejudice

The Court of Appeal has clarified the test it will apply when deciding whether a petition for unfair prejudice can be used to seek compensation for a company.

What happened?

Ntzegkoutanis v Kimionis [2023] EWCA Civ 1480 concerned a company (Coinomi Limited) established by two individuals (Mr Ntzegkoutanis and Mr Kimionis) to develop a cryptocurrency wallet app. Mr Ntzegkoutanis and Mr Kimionis became Coinomi’s sole shareholders and directors.

In due course, Mr Ntzegkoutanis claimed that Mr Kimionis had excluded him from the management of Coinomi’s business and, in breach of his statutory duties to Coinomi, had diverted Coinomi’s assets to a new company established and owned by him.

Mr Ntzegkoutanis brought a petition in unfair prejudice under the Companies Act 2006, claiming that Mr Kimionis had managed Coinomi’s affairs in a way that was unfairly prejudicial to him.

Mr Ntzegkoutanis sought an order from the court that (among other things):

  • the assets that had allegedly been diverted from Coinomi were held on trust for Coinomi;
  • Mr Kimionis and the companies he owned compensate Coinomi for its loss; and
  • Mr Kimionis sell his shares in Coinomi to Mr Ntzegkoutanis at a reduced value.

Mr Kimionis argued that remedies 1 and 2 above amounted to remedies for Coinomi, not for Mr Ntzegkoutanis as a shareholder of the company, and that the only way to obtain these remedies was to bring a derivative claim on behalf of Coinomi (and not through an unfair prejudice petition).

In particular, he noted that, to be able to bring a derivative claim on behalf of a company, a shareholder needs to meet threshold tests that are designed to filter out spurious claims. By wrapping the claim up in an unfair prejudice petition, he said, Mr Ntzegkoutanis was effectively bypassing that filter.

What did the court say?

The court disagreed. The judges acknowledged that the court has a significant degree of flexibility to make any order it considers appropriate to address unfair prejudice, and this can include an order compensating the company itself, rather than a shareholder.

However, they agreed that an unfair prejudice petition cannot simply be used as an alternative way of seeking a remedy that would not be available through a derivative claim.

The court therefore set out a relatively simple approach:

  • On an unfair prejudice petition, the court can grant an order compensating the company, rather than a shareholder. However, the compensation must correspond to the compensation (if any) which the company would have obtained through a successful derivative claim.
  • The court will not grant an order compensating the company itself if that is the only remedy the shareholder is seeking, or if the shareholder does not, in reality, have any genuine interest in any other remedies they are seeking.
  • The corollary of this is that, if the shareholder is both seeking compensation for the company and genuinely pursuing a remedy for themselves, it will normally be appropriate to hear the petition.

What does this mean for me?

Although this is a very technical case that does not immediately throw up any practical points, it does demonstrate the need for an aggrieved shareholder seeking a remedy to formulate their claim properly.

Depending on the size of their holding, shareholders in a company have a variety of methods at their disposal to address and remedy any alleged mismanagement of the company’s affairs. These may include one or more of the following.

  • Convening a meeting of the company to replace the board. This can be a time-consuming process and will be useful only if the shareholder holds, or has the support of shareholders holding, a majority of the company’s voting rights. However, if the shareholder can seize control, they can then direct the company to bring proceedings against the directors in question.
  • Bringing a derivative claim on behalf of the company against the directors. This can be tricky, as the shareholder needs to jump through various tests to obtain the court’s permission to start proceedings, and any remedy ultimately belongs to the company, not the shareholder. But it is a remedy available, in theory, to any shareholder, whatever the size of their holding.
  • Launch a petition in unfair prejudice. Again, this is available to any shareholder, whatever the size of their holding. However, the shareholder will need to demonstrate that they have been prejudiced in some way and that that prejudice is unfair.
  • Petition the court to wind the company up on the basis that it is “just and equitable” to do so. However, this is a terminal option that will result in the company being dissolved. It is really only appropriate if there has been some kind of fraud or if the company no longer serves any purpose.

In all cases, an aggrieved shareholder should take legal advice on the best course of action.

Access the Court of Appeal’s decision on the overlap between unfair prejudice and derivative claims