Can company money be used to fund a dispute between a company's shareholders? No!

Can company money be used to fund a dispute between a company's shareholders? No!

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In the recent case of Michael Gott v Rune Hauge and Ors [2020] EWHC 1152 (CA), the Court re-affirmed the well-established principle that company funds should not be used to pay legal and professional costs in disputes between the company’s shareholders.

Background

A shareholder of a company is permitted, pursuant to Section 994 of the Companies Act 2006, to petition the Court for relief on the ground that the company’s affairs are being or have been conducted in a manner that causes unfair prejudice to the interests of members generally or to specific members (including at least the petitioning shareholder himself).

Facts

Mr Gott, being a shareholder of Profile Partners Limited (the “Company”), issued a Section 994 petition (the “Petition”) against nine respondents:

  • 2 individual shareholders in the Company; the first and second respondents
  • 7 companies which were shareholders in the Company and members of the Profile Partners Limited group:
    • The third and fourth respondents
    • The fifth to eighth respondents (included for the injunction but no claims were made against them in the Petition)
    • The ninth respondent

As well as the Petition, Mr Gott applied to the Court for an injunction to prevent the individual respondents from using Company money to pay their legal costs in defending the Petition.

Although Mr Gott did not include any claims against some of the companies in the Petition (the fifth to eighth respondents), he included them as part of the injunction to prevent the individuals using those other companies to pay any costs for the purposes of the Petition.

Prior to the application for an injunction, the individual respondents had already undertaken not to use the funds belonging to the Profile Partners Limited group companies (the “Undertakings”). The fifth to eighth respondents, however, were not party to these Undertakings.

The companies resisted the injunction application arguing that they should be permitted to use their own funds to pay their costs in connection with the Petition because they hadn’t signed up to the Undertakings and should therefore be entitled to spend their own money to defend their own positions (which they argued were distinct from the positions of the first and second respondents who were individuals).  

The fifth to eighth respondents also sought to rely upon Article 6 of the European Convention on Human Rights (“ECHR”). The ECHR makes it clear that, where a public authority, such as the Court, intends to take action which deprives a party of the ability to spend its own money as it wishes, it can only do so where the interference is permitted by law, reasonable, proportionate and necessary.

Decision

The Court held that:

  • The interests of the fifth to eighth respondents were not sufficiently distinct from the position of the other respondents (even though the Petition did not include claims against them) and
  • It was important that the first and second respondents did not obtain an unfair advantage in the litigation by virtue of their access to Company funds

There was therefore no justification for an exceptional departure from the well-recognised principle that a company’s money should not be spent on disputes between shareholders.  The recent case of Koza Ltd and Hamdi Akin Ipek v Koza Altin Isletmeleri AS [2020] EWHC 1092 (Ch) confirms the position is the same in arbitrations between shareholders.

Other considerations in play:

  • This principal is also relevant when considering the question of privilege. It’s easy to see how this could give rise to arguments about privilege and the right to see advice given – if the company has paid for the advice, should all the shareholders be entitled to see it? The answer to that is beyond the scope of this article, but it’s not straightforward.
  • VAT - while there may be a VAT saving if the company pays the legal costs, if the invoice is properly an expense of the individual shareholders then this will cause problems at a later date and should be avoided.

Contact our experts for further advice

View profile for Catherine PennyCatherine Penny, View profile for Elizabeth ButlerElizabeth Butler

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