Court Allows An Unfair Prejudice Claim To Proceed Despite The Petitioner’s Company Shares Having Been Appropriated By The Company Following The Presentation Of The Petition

In the recent case of Re Motion Picture Capital Ltd; Clarance v Nayar and others [2021] EWHC 2504 (Ch), the Court had to decide whether a petitioner was still able to continue with an unfair prejudice claim after their company shares had been transferred by the business and its shareholders following the presentation of the petition.

Re Motion Picture Capital Ltd; Clarance v Nayar and others

Case summary

The Petitioner (film producer, Mr Leon Clarance) in this case was a shareholder and the previous Chief Executive of Motion Picture Capital, which specialised in the development and financing of films and television programmes.

Under Section 994 of the Companies Act 2006, Mr Clarance had initiated unfair prejudice proceedings against Motion Picture Capital and the other two Shareholders of the business – Mr Deepek Nayar and Reliance Big Entertainment, Inc.

When Mr Clarance had originally brought the proceedings against the business, he was a member of it, but afterwards, his shares were compulsorily transferred to the other two Shareholders as nominees for Motion Picture Capital due to the failure to pay a debt owed by the Petitioner to the business. The transfer of shares had been carried out under a Power of Attorney contained in the charge, which secured the debt.

Whilst Mr Clarance was no longer a member of the business, it was still possible for him to pursue the petition under Section 994(1) and 994(2) of the Companies Act 2006. These Sections state that a petition can be made by a company member or a person whose business shares have been transferred but the shares don’t have to be continually held by the petitioner up until the petition being heard.

The Court had to rule whether the Petitioner was able to continue with pursuing the petition. The main issue in respect of this was whether it was clear that the resolution sought by Mr Clarance would not be granted at trial. The Court considered, during the preliminary hearing, its position in respect of a petitioner who had voluntarily transferred their shares to a petitioner whose shares were compulsorily transferred, as was the case with Mr Clarance.

It deemed that in the case of a person who has their shares voluntarily transferred, it wouldn’t be possible for a petitioner to have any interest in their desired remedy and why the petition should continue. However, it wasn’t so clear cut when it came to a petitioner who’s had their shares involuntarily transferred and the overall decision as to whether the petition should be allowed to continue or not should be dependent on the relevant facts and circumstances of the case.

In deciding whether Mr Clarance’s claim had a real prospect of proving that the Company had improperly exercised its discretion in transferring his shares, the Court noted the following:

• Motion Picture Capital had not exercised any legal right under the charge to involuntarily transfer the shares in part payment of the aforementioned debt. The shares had been transferred under a Power of Attorney contained in the charge.
• Due to the lack of an available market, instead of selling the shares, the Company had sought to credit the value of them against the debt. However, there was nothing contained within the charge which permitted the Company this right.
• The transfer of the Petitioner’s shares to the nominees provided no benefit to Motion Picture Capital, although it was clear that the other two Shareholders hoped that this would give them a decent chance of the petition being dismissed on the grounds of standing.
• Finally, if Mr Clarance’s claim did proceed to trial and it ultimately provided to be successful, the debt and any other interest owed to the Company would be cleared and Mr Clarance would receive a substantial pay-out. The Court noted that the two Shareholders had not considered the loss that the Company might incur due to the Petitioner no longer being a member of the Company and, as they wrongly assumed would be the case, no longer having the legal right to continue to pursue the unfair prejudice petition.

The Court ultimately sided with Mr Clarance, allowing him to continue with the petition. The Court found that he had a good prospect of proving at trial that the two Shareholders had exercised their powers for an improper purpose and hadn’t acted in good faith and the interests of Motion Picture Capital. Further, the subsequent acts of the Shareholders amounted to further unfairly prejudicial conduct against Mr Clarance.

The case highlights the need of demonstrating the actions of a business and its shareholders to compulsorily acquire shares is carried out for a proper purpose and in good faith, and done in the best interests of the company.