Unfair Prejudice: when a director’s conduct backfires

As with any form of relationship, business relations between company directors can turn sour. This is the reality of life and means it is wise to consider at the outset how the business should best be run should things go wrong. The award-winning corporate lawyers at ParrisWhittaker in the Bahamas are experienced in advising and supporting directors and business partners.

We know that no director wants to countenance the possibility of a falling out, but if it was to happen – the conduct of all directors/shareholders must remain professional and above reproach. Where there is unsatisfactory behaviour on the part of a director that negatively impacts another – an unfair prejudice claim could follow.

A recent case¹ is a prime example of the dangers of side-lining a fellow director after a relationship breakdown; emphasising the importance of maintaining professional and transparent business dealings in compliance with company law.  The ruling, from the UK’s High Court, has persuasive authority on the courts in the Bahamas and should be noted.

What is ‘unfair prejudice’?

Unfair prejudice describes situations where the majority shareholders (who are often directors), abuse their powers to further their own interests – to the detriment of the others. If an unfair prejudice claim is successful, the court has a range of powers to order relief – typically the respondent will be ordered to buy out the claimant’s share at a fair price.

What happened in this case?

In this recent case, a couple (D and O) had two children and were also the two joint directors/ shareholders in two companies. They produced stone and concrete products and built houses. When their personal relationship broke down, so did their mutual trust and confidence in their business relationships.

Meanwhile, the businesses were struggling to stay afloat – leading directly to O making various unwise decisions to the exclusion of D.  This included:

• Appointing a third party in D’s place as a director without giving her any information about this
• Dealing with a company with a view to disposing of both his and D’s share in one of the two companies
• Made significant withdrawals without adequate explanation and
• Secured a loan which D said she had not agreed to

D therefore brought an unfair prejudice claim against O under the UK’s Companies Act 2006 (s994)², arguing that O had excluded her from the running of the companies and misappropriated assets.

The court found in D’s favour, ruling that O – who the judge said was “less than straightforward” in giving evidence – had primarily looked after his own interests and those of his own (separate) company. His conduct had gone beyond lack of information and went as far as misuse of the company assets – all of which was unfairly prejudicial to D.

O was ordered to purchase D’s shares at the price based on a report from a valuation expert.

What does this mean?

Breakdowns in personal and/or business relationships happen. But they are not to be used either as a tool to punish or make things difficult for another party, or as a reason to breach your legal obligations to further your own interests.

Business dealings must continue to be handled professionally and transparently, however challenging it might be. This case illustrates the risks of embarking on a course of conduct that could trigger an unfair prejudice claim. Such a claim could well prove costly and harm your reputation.

How can we help?

We advise and represent directors, shareholders and partnerships in sectors on their legal obligations and in circumstances where disputes have arisen. For specialist advice from expert commercial litigation lawyers at ParrisWhittaker contact us on +1.242.352.6112

¹Re Greenfrost Ltd; Davies v O’Keeffe [2023] EWHC 5 (Ch)

²In The Bahamas, the remedy lies under the Companies (Amendment) Act 2019