Zedra Trust Company (Jersey) Ltd v The Hut GroupLtd & Ors

Factual and Procedural Background

This appeal concerns an order dismissing an application to strike out a petition presented under section 994 of the Companies Act 2006. The petition, presented on 7 January 2019 by the Plaintiff, a trustee company holding shares in Company A, alleges that the affairs of Company A have been conducted in a manner unfairly prejudicial to the Plaintiff's interests. At the time of the petition, the Plaintiff held approximately 8.34% of the issued share capital and 9.63% of the voting rights of Company A.

The respondents to the petition are Company A and fourteen individuals who served as directors during the period May 2011 to November 2018, during which the alleged unfairly prejudicial conduct occurred. The principal complaint is that share issues by Company A between February 2016 and May 2018 diluted the Plaintiff's relative shareholding from 13.12% to 8.34%, and voting rights from 13.28% to 9.63%. Additional complaints concern failures to provide information and alterations to co-sale rights in the articles of association, which adversely affected the Plaintiff's shares.

The respondents applied under CPR 3.4 to strike out the petition or parts of it as abusive, unsustainable, or improperly pleaded. The application was heard by Judge Eyre QC and dismissed on 17 January 2020. The respondents appeal with permission granted by the Court of Appeal.

Legal Issues Presented

1. Whether the court has power under section 996 of the Companies Act 2006 to order Company A to issue shares or alter its articles to restore the Plaintiff's co-sale rights and shareholding percentage.
2. Whether the allegations of bad faith and improper purpose against the directors are sustainable on the pleadings.
3. Whether the claims for compensation by the Plaintiff, particularly against the directors, are barred by the rule against reflective loss.

Arguments of the Parties

Respondents' Arguments

• The petition is in substance a derivative claim and should be struck out for failure to obtain permission to bring such a claim.
• The court lacks power to order the issue of shares or alteration of articles affecting non-parties’ rights without joining or notifying those shareholders.
• The claims for compensation are barred by the rule against reflective loss.
• The allegations of bad faith and improper purpose are unsustainable as they are not supported by adequate factual pleading, particularly against individual directors.

Plaintiff's Arguments

• The petition properly seeks relief under section 994 for unfair prejudice to the Plaintiff as a member, not derivative relief for the company.
• The court has broad discretion under section 996 to grant relief, including ordering share issues or alteration of articles, subject to appropriate safeguards.
• The allegations of bad faith and improper purpose are adequately pleaded, including collective conduct by directors, and should not be struck out at this stage.
• The claims for compensation are not barred by reflective loss as the company has suffered no loss; the loss is alleged to be personal to the Plaintiff as a shareholder.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by accepting the pleaded facts as true for the purpose of the strike-out application. It confirmed that the petition was properly brought under section 994 for unfair prejudice, not as a derivative claim, because the alleged loss was to the Plaintiff as a shareholder, not to Company A.

Regarding the relief sought for alteration of articles and issuance of shares to restore the Plaintiff's rights, the court acknowledged that while such orders might affect non-parties’ rights, this was not a basis for striking out the petition at this stage. The court rejected the submission that such orders would necessarily breach Article 1 of Protocol 1 of the European Convention on Human Rights, noting that any share issue could be structured to avoid uncompensated deprivation by requiring payment from wrongdoers.

On the allegations of bad faith and improper purpose against the directors in relation to share issues, the court found the pleadings insufficient. The petition did not challenge the commercial legitimacy or terms of the share issues, nor identify the recipients of the shares. The court emphasized that dilution alone, without more, does not establish bad faith. Allegations of failure to inform and withholding information were insufficient on their own to support bad faith.

The court also found the claims for compensation to the company and then to the Plaintiff misconceived, as the company had suffered no loss. It struck out the claim for compensation payable to the company, but retained the claim for direct compensation payable by directors to the Plaintiff, subject to case management review.

The court identified two respondents who were not directors at relevant times and against whom no allegations were made, and ordered their removal as parties.

Ultimately, the court struck out the allegations and relief related to the share issues due to lack of sustainable pleading but allowed the petition to proceed in a reduced form concerning co-sale rights and information obligations, with further directions for case management.

Holding and Implications

The court DISMISSED the appeal in respect of the powers of the court to grant relief affecting shareholdings and articles, confirming such relief is within the court's discretion under section 996.

The court ALLOWED the appeal to the extent of striking out the allegations of unfair prejudice related to the share issues between February 2016 and May 2018, including associated claims for relief and compensation, due to insufficient factual pleading to support bad faith or improper purpose.

The court struck out the claim for compensation payable to the company but retained the claim for compensation payable directly by directors to the Plaintiff, subject to further case management.

The court ordered removal of two respondents who were not directors at relevant times and against whom no allegations were made.

The petition was remitted for case management to consider the future conduct of the proceedings, including any applications to amend.

The decision leaves intact the Plaintiff's claims regarding co-sale rights and failures to provide information, but no new legal precedent was established beyond the application of established principles to the facts of this case.