UK: Unfair Prejudice: Relief Possible Where Company Insolvent And Member Cannot Benefit

Where an investor in a joint venture company has invested not only by subscribing for shares but also by advancing loan capital, the investor may be granted relief from unfairly prejudicial conduct even though such relief will benefit the investor only as a loan creditor and not as a member.

So held the Privy Council in the recent case of Gamlestaden Fastigheter v Baltic Partners Ltd & Others. Baltic was the corporate vehicle through which Gamlestaden and another individual had agreed to pursue a joint venture. Gamlestaden held a minority stake in Baltic, but most of its joint venture investment had been made by loans to Baltic. Baltic became insolvent following alleged acts of mismanagement by its directors. Following an unsuccessful derivative action, Gamlestaden launched an unfair prejudice action in Jersey seeking an order that the directors pay damages to the company for breach of duty. Such an order would not benefit Gamlestaden as a member (because Baltic would remain insolvent even if the damages were paid), but would increase the funds available to creditors and benefit Gamlestaden in that capacity.

The Jersey courts struck out Gamlestaden’s application on the basis that Gamlestaden would not benefit as a member from any relief that might be granted. The Privy Council reversed this decision finding that a proper construction of the unfair prejudice provisions did not rule out the grant of relief simply because the relief sought would not benefit the applicant as a member. If the relief sought would be of real value to an applicant joint venturer in facilitating recovery of some part of its investment in the joint venture company that was sufficient to found an application. The justification for seeking relief must be based on a real financial benefit that the investor might achieve if the relief were granted, but this benefit does not have to be a benefit as a member.

The case will now revert to the Jersey courts for a decision on the merits. The unfair prejudice provisions in Jersey on which the case was decided mirror the existing provisions in the Companies Act 1985 and those which will come into force in the Companies Act 2006 on 1 October 2007. As this is a Privy Council decision, the English Courts are not bound it, but it will be highly persuasive. This case therefore has the potential to extend the availability of unfair prejudice remedies under English law.

Case ref: Gamlestaden Fastigheter AB v Baltic Partners Ltd & Others (Jersey) [2007] UKPC 26

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 03/05/2007.