Limitation periods do apply to unfair prejudice claims
For several decades it has been assumed that there is no limitation on the period within which minority shareholders can bring an unfair prejudice claim. But the Court of Appeal has now held[1] that statutory limitation does apply to this remedy, and that the exact period of limitation depends on the type of relief being asked for. This has implications for all company directors and shareholders involved in corporate disputes.
What was the background to the case?
In THG PLC v Zedra Trust Company (Jersey) Limited, Zedra had issued an unfair prejudice petition against THG and its directors in 2019. The petition underwent various amendments. In 2022 Zedra sought permission to amend the petition alleging its wrongful exclusion from a bonus share issue in 2016. It contended that this exclusion was as a result of the directors breaching their statutory duties, and asked for an order that the relevant directors pay it equitable compensation to redress that loss. THG objected, alleging that this amendment had not been brought in time. The judge in the high court rejected this objection, considering himself bound by previous case law that assumed that unfair prejudice petitions were not subject to any statutory period of limitation.
The Court of Appeal was asked to decide, as a matter of principle, whether any limitation period applies to an unfair prejudice claim; and if so, what that period is.
What is unfair prejudice?
Unfair prejudice is the conduct, or threatened conduct, of a company’s affairs by majority or controlling shareholders and the board of directors that is objectively unfair to equal or minority shareholders because they are consequently prejudiced. This may include abuse of power or mismanagement. The Companies Act 2006 (Section 994) provides protection and relief for minority shareholders against this sort of conduct.
What is an unfair prejudice claim?
The remedy offered by the Companies Act 2006 is an unfair prejudice claim. It allows the shareholder who suffers unfair prejudice to ask the court to intervene and to give appropriate relief. The procedure is to bring a petition and then to hold a hearing at court when a ruling will be made and relief granted to the petitioner where appropriate.
A common form of relief will be a buy-out order, requiring the other shareholders to buy the petitioner’s shares at a fair value. The court has a wide discretion to award other appropriate relief, including the payment of equitable compensation that Zedra was seeking.
We have previously considered unfair prejudice petitions in more detail here.
Is there a time period in which a petition must be brought?
Yes. The Court of Appeal in the Zedra case examined the basis for the long-held assumption that limitation does not apply to unfair prejudice petitions and decided that there is nothing to support it. The three judges unanimously agreed that statutory limitation does apply to unfair prejudice petitions:
- A 12-year limitation period under section 8 of the Limitation Act 1980 applies from the date on which the cause of action accrues.
- But, if the claim is for compensation or monetary relief, a 6-year limitation period applies in terms of section 9 of the Limitation Act 1980.
- Section 35 of the Limitation Act 1980 and CPR 17.4 apply to applications to amend an unfair prejudice petition after the expiry of a limitation period.
What is the purpose of limitation?
“Limitation reflects a fundamental and all but universal legal policy that the litigation of stale claims is potentially a significant injustice. Delay impoverishes the evidence available to determine the claim, prolongs uncertainty, impedes the definitive settlement of the parties’ mutual affairs and consumes scarce judicial resources in dealing with claims that should have been brought long ago or not at all.”[2] – Lord Sumption
There is no principle of limitation at common law; our law on limitation periods is therefore what is set out in the Limitation Act 1980[3]. The thought behind this statute is that it is in the public interest that a person with a good cause of action should pursue it within a reasonable time. This increases transparency and reduces uncertainty for other parties involved in a dispute.
Limitation is intended to discourage the raking up of old grievances, or as Lord Sumption said in the case quoted above, to prevent the raising of “stale claims”. It should provide a more efficient legal process.
More than 20 years ago the Law Commission, in its Limitation of Actions Report[4], said that unfair prejudice petitions should be subject to the same limits as other disputes. The Court of Appeal has now confirmed that this limitation does apply.
How are remedies for unfair prejudice affected?
Directors and shareholders should now be aware of the potential for limitation defences against unfair prejudice claims, but also need to be clear about which limitation periods apply to the type of relief sought:
- The court in the Zedra case clarified that a buy-out order is not a money judgment, and therefore a 12-year limitation will apply.
- However, any claim for monetary relief may only have a 6-year limitation.
Many petitions rely on a course of conduct over time as cumulative evidence of unfair prejudice. Some of this conduct may be within the statutory time limits, but other conduct may be outside these limits. In other situations that give rise to an unfair prejudice petition, wrongdoing by shareholders or directors of a company may be concealed from a petitioner for a long period of time. In those situations section 32 of the Limitation Act 1980 will apply, and the running of the statutory time limit will only start when the petitioner knows about, or should reasonably know about, the actions or concealment that have caused the prejudice.
Summary
While the circumstances which give rise to unfair prejudice claims often develop over several years, this does not mean that complainants in these disputes are in any more favourable position than other type of litigant. Time limits do apply to unfair prejudice remedies and the type of relief being sought. Shareholders and company directors who are involved in disputes should seek clarification about the applicable limitation periods as soon as possible.
Our Commercial Litigation team has considerable experience in acting for minority and majority shareholders, and directors in shareholder disputes. We are always available to assist you.
[1] THG PLC v Zedra Trust Company (Jersey) Limited [2024] EWCA Civ 58. 23 February 2024
[2] Abdulla v Birmingham CC [2012] UKSC 47 at 41
[3] McGee, Limitation Periods, 9th ed
[4] Limitation of Actions Report, 2001, para 4.211 – 4.218
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