Unfair prejudice applications

The recent judgment of the Royal Court of Jersey in Pender v GHH (Jersey) Ltd & Ors [2019] JRC228[1] has provided important guidance on the approach to be taken when joining parties to unfair prejudice proceedings. The Court also set out the parameters for awarding costs when parties have been joined unnecessarily.

 

Background

The plaintiff shareholder brought unfair prejudice proceedings against GGH (Jersey) Limited (‘the Company’) and all of its then 10 shareholders complaining of his dismissal as CEO, the dilution of his shareholding in the Company, his removal as a director of the Company and his classification as a ‘bad leaver’ resulting in the confiscation of some of his shares in the Company.

The plaintiff sought relief against only the Company and the majority shareholder Punter Southall Group Limited. No relief was sought at all against any of the other shareholders and no factual allegations were made against 8 of GHH (Jersey) Limited’s remaining 10 shareholders.

Applying to serve the non-Jersey shareholder defendants out of the jurisdiction, the plaintiff had described all of the defendants as “necessary and proper parties to this action”, a requirement for joining third parties imposed by Rule 7(s) of the Service of Process (Jersey) Rules 1994.

Permission to serve the defendants having been granted, a dispute arose as to the filing of defences.

Royal Court Rule 6/40, which applies to unfair prejudice proceedings, has the effect of suspending the usual timetable for the exchange of pleadings pending an initial directions hearing. The purpose of this rule is to enable the Royal Court to exercise case management control over unfair prejudice applications at an early stage. RCR 6/40 is based upon the English Civil Procedure Rules found in the Companies (Unfair Prejudice Applications) Proceedings Rules 2009.

 

The Issues

Having initially pressed all the defendants for a timetable for the production of an Answer and a timetable having been refused on the basis of RCR 6/40, the plaintiff agreed that nine of the eleven defendants joined to the proceedings could be disjoined as parties. The plaintiff offered to pay the costs of those defendants’ cross application to have themselves discharged from the proceedings on the standard basis. At the hearing, therefore, the issue turned on the costs the disjoined defendants had incurred since being served with the proceedings. However, determining the basis and scope of those costs required an assessment of what constituted “necessary and proper parties” to the unfair prejudice proceedings.

The plaintiff argued that having been joined to the proceedings it was up to each defendant whether they wished to file a defence and up to each defendant whether and to what extent they participated in the proceedings thereafter. The shareholder defendants insisted that a directions hearing should take place before any defence was filed in order to resolve the issue of whether certain defendants were genuinely necessary and proper parties to the proceedings.

With no Jersey precedent to rely on, the Court began by considering the English approach to joinder in unfair prejudice claims. The English courts had in the past expected plaintiffs to cast a wide net: any member of a company who might be affected by the outcome of such proceedings should be joined onto them.[2] However, the trend in more recent English case law had indicated a change of approach.  The courts expected a shareholder to be joined as a respondent only where it is alleged they were involved in the conduct alleged or where the remedy sought is likely to have a significant effect on that shareholder.[3]  If it was plain and obvious that the relief sought would not be granted against a particular shareholder, the claim against that shareholder should be struck out. It followed as a matter of logic that such a shareholder could not be a necessary and proper party and should not be joined as a defendant at the outset.

The latter approach was reinforced by the overriding objective prescribed by the Civil Procedure Rules which requires parties to assist the court in “dealing with a case justly and at proportionate cost”.

Although the Court noted that in Jersey it was a matter for the plaintiff to decide which parties to join to proceedings, such a decision should be based on the same principles currently applied in England. Whilst those shareholders significantly concerned with a claim (meaning those who were involved with the conduct alleged to be unfairly prejudicial or where the remedy sought is likely to have a significant effect on them) should be joined as parties, other shareholders need only be notified of the proceedings so that they can decide for themselves what position to adopt and whether they wished to be joined.  The Court has imposed a duty on plaintiffs and their advisors to exercise judgment to carefully evaluate who are the necessary defendants rather than just convening everyone who happens to be is a shareholder.

 

Costs

In deciding to award costs against the Plaintiff, the Court ordered costs on the standard basis on the grounds that the plaintiff had initially left the decision of filing defences to the those defendants in question and had subsequently released them when they indicated they did not wish to take part in the proceedings. As to the scope of costs, the Court affirmed that where a costs order is made against a party, what that party is liable to pay are costs necessarily incurred by the receiving party who had been joined, which included advice concerning:

 

(i) What the proceedings were about;

(ii) How far the defendants had to take part in the proceedings;

(iii) What steps had to be taken to procure their removal as parties and taking those steps;

(iv) The consequences of the defendants remaining as parties;

(v) Insofar as defendants were trustees, advising them on their responsibilities as trustees in relation to the proceedings brought (which would include whether to seek, and potentially any costs incurred in preparing for Beddoe relief);

(iv) The merits of any jurisdiction challenge by any of the defendants.

 

Where there are multiple parties who all have to be separately advised on their positions, the potential for costs to quickly escalate is obvious.

 

Conclusions

In preparing an application for service out of the jurisdiction, a plaintiff should address the issue of which particular defendants a plaintiff proposes to convene as a party and why they are “necessary and proper parties”, especially where there is a risk that the claim against a defendant might later be struck out because no relief is claimed against them and the proceedings do not materially affect their interests.

Unfair prejudice proceedings are notorious for quickly becoming expensive and cumbersome pieces of litigation. This judgment serves as a warning to plaintiffs who seek to join everyone to their dispute as well as highlighting the increasing importance of the overriding objective in Jersey cases to reduce the time and cost of proceedings to what is strictly necessary. While it is up to a plaintiff to decide who to sue in unfair prejudice applications a plaintiff who joins unnecessary shareholders can expect to be liable for their costs.

 

James Sheedy, Senior Associate

[1] [2019] JRC 228

[2] See for example Supreme Travels Ltd v Little Olympian Each Ways Ltd [1994] B.C.C. 947,  Company (No.007281 of 1986), Re 1987 B.C.C. 375 per Vinelott J at pp 380-381

[3] Re Pedersen (Thameside) Ltd [2018] B.C.C. 58

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