Company money should not be used to pay legal costs in disputes between shareholders

29 May 2020

In the recent case of Michael Gott v Rune Hauge and ors [2020] EWHC 1152 (Ch) the court upheld the well-recognised principle of company law that a company’s money should not be used to pay legal costs in disputes between the company’s shareholders.


This case relates to proceedings brought under the Companies Act 2006 s.994 which provides at subsection (1):

A member of a company may apply to the court by petition for an order under this Part on the ground—
(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

Facts

Mr Gott issued a s.994 petition against nine respondents (the ‘Petition’). The first and second respondents were individuals and, like the petitioner, shareholders in the fifth respondent company. The third to ninth respondents were all companies.

In a letter from the respondents' solicitors dated 21 June 2019, the first and second respondents undertook that "pending the resolution of the current dispute between the parties as set out in the letter before action ... they shall not use funds belonging to the PP Companies (as defined) or any of them to defend on their own behalves any petition presented and served on them in the same or substantially the same form ... as that sent in draft under cover of a letter dated 19 February 2019 from Mischon de Reya LLP" (the ‘Undertaking’). The fifth to eighth respondents were not parties to the Undertaking.

  1. the first and second respondents from breaching the Undertaking;
  2. the fifth to eighth respondents from incurring expenditure on legal or professional services for the purposes of the Petition, the respondents' counterclaims and/or any other aspect of the dispute between the petitioner and the first to fourth respondents;
  3. the first to fourth respondents from causing or permitting the fifth to eighth respondents from taking the actions at (ii) above;
  4. until final judgment in the claim, the fifth to eighth respondents from paying invoices presented by the first respondent; and
  5. until final judgment, prohibiting the first to fourth respondents from causing or permitting the fifth to eighth respondents from taking actions described at (iv) above

(the ‘Injunction Application’).

Outcome

It is a well-recognised principle of company law, and not in dispute in these proceedings, that a company’s money should not be used to pay for legal fees in disputes between the company’s shareholders.

However, Counsel for the fifth to eighth respondents (all companies) argued that they should be allowed to spend their own money defending their own positions (not those of the first and second respondents) in the Injunction Application. He highlighted that the court would usually make provision for a respondent to an application for a freezing injunction to be able to pay for its own reasonable legal costs. .

While the fifth to eighth respondents were not parties in their own right to the Undertaking, it had been entered into for the purpose of protecting and preserving the assets of the fifth respondent pending the outcome of the s.994 proceedings and to ensure that the first and second respondents did not obtain an unfair advantage in the litigation by being able to use company funds to fund their defence of the petition.

The judge held that on the basis of the pleaded claim/defence, the interests of the fifth to eighth respondents were inextricably linked to and combined with the positions of the other respondents and, therefore, did not justify an exceptional departure from the general rule that the money of the companies (the fifth to eighth respondents), should not be spent on disputes between shareholders. Accordingly, the fifth to eighth respondents were not permitted to use their own money to pay for the legal costs incurred in dealing with the Injunction Application.

Comment

In this case, no evidence was before the court of the separate interests which the fifth to eighth respondents sought to protect in the Injunction Application, or of how their costs of the Injunction Application would be separately identified from those of the first to fourth respondents, or further still of any damage that would be caused to them which could not be financially compensated by the petitioner. Had such evidence been forthcoming, it is entirely possible that the outcome would have been different.

About the authors

Katie Allard is an Associate in the Dispute Resolution Team. She has a wide-ranging commercial practice with particular focus on complex civil fraud claims, boardroom and shareholder disputes, and breach of contract claims, acting for both claimants and defendants.  

Fiona Simpson specialises in civil fraud litigation, advising clients bringing or defending civil fraud proceedings, often involving injunctions and often with an international dimension.  Fiona regularly advises on freezing orders and asset tracing. She has been listed as a Thought Leader  in Asset Recovery in the Who's Who Legal Global Investigations Review 2020.

 

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