Unfair prejudice petitions under section 994 of the Companies Act 2006 are usually associated with shareholder disputes about management, dividends or the direction of a company. However, these disputes can also raise complex tax and insolvency issues, particularly where the company’s financial position is uncertain.
Shareholder litigation often involves remedies such as share buy-outs, compensation orders or changes to company governance. Each of these outcomes can have financial and legal consequences beyond the immediate dispute.
For this reason, shareholders involved in unfair prejudice claims should consider not only the legal merits of the case but also the wider financial implications.
Why can tax and insolvency issues arise in unfair prejudice petitions?
Shareholder disputes frequently arise during periods of financial pressure for a company. When a business experiences declining profitability or liquidity problems, disagreements about strategy and financial management may intensify.
At the same time, unfair prejudice claim petitions may involve remedies that affect the financial structure of the company or the personal finances of shareholders.
For example:
- a court-ordered share purchase may require significant funding
- compensation orders may affect the company’s financial position
- allegations of misconduct may lead to scrutiny of financial transactions.
These factors mean that tax and insolvency considerations often become relevant during shareholder litigation.
How can share buy-out orders create tax consequences for shareholders?
One of the most common remedies in unfair prejudice claims is a share purchase order, requiring one shareholder to buy the shares of another at a fair value.
Although this remedy resolves the dispute between shareholders, it may also create tax consequences depending on the structure of the transaction.
For example,
- a shareholder selling their shares may incur capital gains tax on any gain realised from the sale.
- the tax treatment may depend on several factors, including the shareholder’s individual tax position and the circumstances in which the shares are sold.
In some cases the company itself may purchase the shares from the exiting shareholder. Share buy-backs by companies can raise additional tax issues and require compliance with specific statutory procedures.
Because tax consequences can significantly affect the financial outcome of a dispute, specialist advice is often required when structuring a buy-out.
What happens if the company becomes insolvent during a shareholder dispute?
In some situations a shareholder dispute may arise while the company is experiencing financial distress. If the company becomes insolvent during the dispute, the legal position can change significantly.
- Once a company enters liquidation or administration, the interests of creditors take priority over those of shareholders.
- This can affect the practical value of any shares and the remedies available to the parties.
An insolvency practitioner appointed to the company may investigate the conduct of directors and the financial affairs of the business. Transactions that occurred during the dispute may be scrutinised to determine whether they were appropriate.
Where allegations involve misuse of company assets or breaches of directors’ duties, the insolvency practitioner may pursue separate legal claims on behalf of the company.
How do insolvency practitioners approach unfair prejudice allegations?
Insolvency practitioners are primarily concerned with protecting the interests of the company’s creditors. When a company enters insolvency procedures, they may review the circumstances surrounding any shareholder disputes.
If allegations in an unfair prejudice petition relate to misconduct by directors, those issues may overlap with other potential claims. For example, allegations concerning diversion of company assets or improper financial transactions could be relevant to claims brought by an insolvency practitioner.
In some cases the insolvency practitioner may pursue recovery actions to maximise returns to creditors. This can change the dynamics of the dispute between shareholders.
What practical issues should shareholders consider before bringing a petition?
Shareholders considering an unfair prejudice petition should think carefully about the wider financial context of the dispute.
Important questions may include:
- whether the company is financially stable or has company insolvency problems
- whether a buy-out remedy would be commercially viable
- whether tax consequences could affect the value of any settlement
- whether insolvency risks could alter the outcome of the dispute.
Addressing these issues early can help shareholders develop a clearer strategy for resolving the conflict.
Key takeaway
Unfair prejudice disputes often focus on the conduct of shareholders and directors. However, the financial consequences of these disputes can extend beyond the immediate legal issues.
Tax implications, funding considerations and the possibility of insolvency may all influence the outcome of shareholder litigation. Careful planning and specialist advice are therefore important when considering legal action under section 994 of the Companies Act 2006.
My situation involved the disposal of a minority shareholding in a small business. On the face of it there didn’t seem much I could do but following my introduction to Francis Wilks & Jones and more particularly Maria Koureas-Jones and with the help of her colleagues they patiently worked away to counter the other sides arguments and eventually achieved a very satisfactory result for me. I can highly recommend all at Francis Wilks & Jones.
A shareholder for whom we successfully settled a shareholding disposal dispute
