Reconceptualising Shareholder Remedies to Mitigate the Problems Caused by the Overlap between Section 994 and Part 11 Companies Act 2006

Shenara Perera

doi:10.14324/111.2052-1871.111

Abstract

To download this paper, please click here . The contemporary paradigm relating to shareholder remedies under English company law identifies a fundamental overlap between the Section 994 and Part 11 of the Companies Act 2006. The underlying cause of the overlap is that an alleged breach of directors’ duties can establish a claim under both remedial jurisdictions. This article argues the overlap between the jurisdictions generates three undesirable consequences. First, shareholders have used s.994 to obtain personal relief on a corporate claim, as opposed to pursuing a derivative claim for corporate relief. Second, s.994 has been used to obtain corporate relief on a corporate claim, instead of bringing a derivative claim. Third, shareholders can exploit s.994 to obtain an order authorising a derivative claim, effectively circumventing the threshold test in Pt 11. The article explores the undesirable impact of these consequences for English company law. In each case, the article recommends three reform proposals which, if implemented, would reconceptualise shareholder remedies under English company law and mitigate the problems caused by the overlap between s.994 and Pt 11.

Highlights

The contemporary paradigm relating to shareholder remedies under English company law identifies a fundamental overlap between the Section 994 and Part 11 of the Companies Act 2006
C) Shareholders can exploit s.994 to obtain an order authorising a derivative claim, effectively circumventing the threshold test in Pt 11 Companies Act 2006 (CA 2006).14 Secondly, in each case, I recommend three reform proposals that aim to mitigate the problems caused by the overlap between s.994 and Pt 11 CA 2006
Where the second solution viz., the removal of the derivative claim jurisdiction under Pt 11 CA 2006 is concerned, the critical question is ‘whether the s.994 remedy provides for what the derivative claim seeks to in a more effective or theoretically sound manner?’207 As Robin Hollington QC states, a Wallersteiner indemnity for costs is a factor that allows derivative claims to supersede the petition in this context.[208]

Summary

INTRODUCTION

Fundamental to the concept of shareholder remedies under English company law is the phenomenon that ‘directors owe their fiduciary duties to the company; not to the shareholders’.1 The phenomenon leads to the inference that breaches of directors’ duties are wrongs committed against the company, in respect of which the company may commence a claim against the directors for corporate redress, by applying the proper plaintiff rule in Foss v Harbottle.[2]. The article asserts that subsequent petitions by individual shareholders to recover their fraction of reflective loss would lead to an inconvenient and inefficient multiplicity of litigation in relation to the one wrong, proving to be costlier than if the court required a derivative action to be commenced.[84] This outcome directly contradicts the aims of the Law Commission's ‘Shareholder Remedies Reform Proposal’ which sets out efficiency and cost-effectiveness as one of the six guiding principles in the consultation paper.[85] The problem of efficiency, may be resolved through case management and procedural rules promoting the consolidation of all shareholders as respondents to one Johnson (n 44) [66]. Applying the precedent created in Atlasview in circumstances where the company is in danger of insolvency, entirely undermines creditors’ interests as ‘the money due to the company bypasses its coffers and goes straight into the shareholders' pockets instead’.93

Proposed Solution

The Middle-Ground Solution

Conclusions