Company Disputes

With directors facing heightened demands to maintain profitability, manage cash flow and preserve business continuity, financial strain can expose and exacerbate tensions between shareholders and management. In particular, Thackray Williams is seeing a growing number of disputes involving allegations that directors have misused company assets or company money for personal benefit, seemingly seeking to maintain their lifestyles from company funds. 

Such allegations commonly lead to two types of shareholder action: unfair prejudice petitions under section 994 of the Companies Act 2006 and, in some cases, derivative claims brought on behalf of the company against the director, under section 260 of the Companies Act 2006. 

Unfair prejudice claims (Companies Act 2006, s.994)

An unfair prejudice petition is typically brought by a shareholder who alleges that the company’s affairs have been conducted in a manner that is unfairly prejudicial to their interests as a member. These claims often arise in owner-managed businesses and quasi-partnership companies, where expectations around participation, transparency and fair dealing can be particularly acute.

Common complaints include:

• excessive remuneration or unauthorised benefits

• diversion of business opportunities

• misuse of company funds

• exclusion from management (especially in quasi-partnership scenarios)

Where a director is alleged to have used company resources to fund a personal lifestyle, minority shareholders may argue that the conduct has diminished the value of the company and unfairly prejudiced their interests. If the petition succeeds, the court has wide discretion as to remedy, most commonly an order requiring the respondent to purchase the petitioner’s shares at a fair value.

Derivative claims: pursuing wrongdoing on behalf of the company (Companies Act 2006, Part 11, s.260)

In more serious cases, shareholders may seek permission to bring a derivative claim on behalf of the company against a director for breach of duty. Unlike unfair prejudice petitions, which focus on prejudice to the shareholder, derivative claims are designed to recover losses suffered by the company itself.

Directors owe statutory duties under the Companies Act 2006, including duties to:

• promote the success of the company

• exercise independent judgment

• avoid conflicts of interest

• not accept benefits from third parties

Where company funds have allegedly been misappropriated for personal expenditure, shareholders may contend that the director has breached these duties and caused loss to the company. If successful, any compensation is recovered for the benefit of the company (rather than directly for the shareholder bringing the claim).

The process of making a derivative claim

The derivative claim procedure has two stages. First, one must issue the claim form and apply for permission to continue it. The court will conduct a prima facie assessment on the papers. If the claim does not disclose a prima facie case for granting permission it will be dismissed without a hearing. If the claim passes that threshold, the court will list a permission hearing where the company and alleged wrongdoers can be heard and evidence can be tested.

Notice and party status are important in derivative claims. The company must be served with the application and evidence, as the company will usually be joined as a defendant for case management purposes and will usually adopt a neutral stance.

Why derivative claims can fall at the first hurdle

There are statutory bars and mandatory refusal grounds. The court must refuse permission if a person acting in accordance with the duty to promote the success of the company would not seek to continue the claim, or if the act or omission has been, or is capable of being, and in fact is, authorised or ratified by the company. Early expert evidence by accountants is key as such evidence substantiates allegations that a director has been acting contrary to the interests of the company. The court will consider the good faith of the applicant, the importance a director acting properly would attach to continuing the claim, the strength of the claim on the merits, and the likely cost-benefit to the company when considering its decision. 

Available remedies under derivative claims

Typical remedies sought on the company’s behalf include damages or equitable compensation, an account of profits, restitution, rescission or setting aside of transactions, declarations of breach, and injunctions or orders for delivery up (restoring assets or records to the company) or specific performance. Any recovery belongs to the company.

Costs and indemnity considerations are central. An applicant is primarily liable for costs in the usual way, but the court has discretion to order the company to indemnify an applicant for reasonable costs of the permission application and proceedings if it is appropriate for the company to bear them. The availability of indemnity often turns on the merits, good faith, proportionality and the company’s best interests. 

Why governance matters more than ever

Thackray Williams’ experience reflects a broader reality: economic pressure does not excuse directors from complying with their legal and fiduciary obligations. Many disputes of this kind can be avoided through robust corporate governance, transparent accounting practices and effective board oversight.

Practical steps that can reduce the risk of litigation include:

• ensuring remuneration, expenses and benefits are properly authorised and documented

• maintaining clear policies on expenses and related-party transactions

• providing shareholders with timely, accurate financial information

• recording board decisions carefully to demonstrate proper consideration and approval

Takeaway

As trading conditions remain challenging, shareholders are scrutinising company accounts more closely and are increasingly willing to challenge perceived abuses of power. Directors who treat company funds as a personal resource risk not only damaging shareholder relationships, but also becoming the subject of costly and disruptive litigation. In the current climate, transparency, accountability and good corporate governance remain the best protection against both unfair prejudice petitions and derivative claims.

If you need help with a company dispute, you can contact Mustafa Sidki in our Dispute Resolution team on 020 8461 6140.