Unfair prejudice: applicant able to claim an order for damages to be paid to the company

01/06/2007

The Privy Council has recently ruled that a claimant could, in an application for unfair prejudice under Article 141 of the Companies (Jersey) Law 1991 (substantively the same as section 459 of the UK Companies Act 1985 and section 994 of the Companies Act 2006), claim an order for damages payable to the company. Provided the relief claimed would be of real financial benefit to the claimant, it did not matter that it would not benefit the claimant in its capacity as a shareholder.

The applicant, GLS, a Swedish company, was a shareholder and creditor of an insolvent joint venture company. GLS had invested in the German property market through a joint venture with K, BPL, which was a company incorporated in Jersey. The majority of shares in BPL were held by K.

BPL's only asset was its interest in the property-acquiring vehicle SPK, a limited partnership, whose three partners were BPL, K and another individual, H. Finance was provided by GLS's parent company. In May 1993, K and H withdrew DM 112.5 million from SPK and subsequently converted SPK from a partnership into a limited liability company, as a consequence of which the debts of DM 112.5 million were eliminated. These acts were done both without GLS's knowledge and the requisite unanimous consent of the partners.

BPL became insolvent around 1997. GLS brought derivative proceedings against the directors of BPL claiming damages payable to BPL. The claim was struck out on the ground that it could not be brought within any of the exceptions to the rule set out in Foss v Harbottle (1843) 2 Hare 461. GLS's subsequent unfair prejudice application under Article 141 was struck out by the Royal Court of Jersey, a decision affirmed by the Court of Appeal of Jersey: an application under Article 141 was a shareholder's remedy, not a creditor's, and the alleged breach of duty by the directors could not be shown to have caused GLS any loss in its capacity as shareholder.

The Privy Council allowed GLS's appeal, granting GLS permission to proceed with its application. An order for payment of damages to the company in an unfair prejudice application could be made: the language of Article 143(1) did not preclude this; such a ruling had previously been made by the Hong Kong Court of Final Appeal (in Re Chime Court Ltd (2204) HKCFAR) and there was no apparent reason not to follow such case; and, in particular, it was no bar to relief that as BPL was insolvent, GLS would not gain any benefit from the relief in its capacity as shareholder of BPL.

Whilst the Privy Council's decision is not technically binding, it does carry high persuasive authority. This case reaffirms the flexible approach taken by the judiciary in construing sections 459 to 461 of the Companies Act 1985.

It will be interesting to note what emerges from GLS's application. We shall update you accordingly.

(See [i]Gamlestaden Fastigheter AB v Baltic Partners Ltd & Ors (Jersey) [2007] UKPC 26)

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