In a significant decision for directors, shareholders, and their insurers, the High Court has confirmed that minority shareholders may pursue unfair prejudice claims arising from alleged diversion of company assets even where the company itself has a cause of action. The judgment in Sandycombe Developments Limited reinforces that the statutory unfair prejudice regime operates independently of the rule against reflective loss, leaving shareholders free to seek relief under the Companies Act 2006, rather than being confined to derivative proceedings.
The High Court considered whether the rule against reflective loss could be used to strike out an unfair prejudice petition based on allegations that company assets had been diverted by those controlling the company for their benefit. The Court rejected that argument.
The decision is significant for directors, shareholders, and insurers because it confirms that minority shareholders are not confined to derivative claims where company assets have been misappropriated and may instead pursue relief through the broader unfair prejudice jurisdiction.
Reflective loss
The rule against reflective loss prevents shareholders recovering diminution in share value or loss of distributions where that loss merely reflects loss suffered by the company and the company itself has a claim against the same wrongdoer.
This issue was last reported in this context in Marex Financial Ltd v Sevilleja [2020] UKSC 31, where the Supreme Court confirmed that the rule is limited to shareholder losses. Importantly, Lord Reed noted that shareholders retain other rights, including the ability to seek relief for unfairly prejudicial conduct.
Facts
Sandycombe Development Ltd was incorporated as a special purpose vehicle for a property development in Richmond. The Petitioners were shareholders of Sandycombe Development Ltd and had invested approximately £3.22 million into the project.
The Petitioners alleged that directors and associated entities diverted company funds and borrowing facilities from the Richmond project to a separate Birmingham development. As a result, they claimed their shares had been rendered worthless and that the conduct was unfairly prejudicial under section 994 of the Companies Act 2006.
The respondents sought to strike out the petition, arguing that the alleged losses were purely reflective and could only be pursued through a derivative claim.
The decision
Mr Justice Cawson dismissed the Strike Out and Summary Judgment application.
The Court held that the reflective loss rule does not bar an unfair prejudice petition. The Petitioners were not advancing an ordinary personal damages claim but seeking relief under the distinct statutory regime in sections 994-996 CA 2006. The fact that the company may also have causes of action arising from the same conduct did not prevent shareholders from pursuing unfair prejudice relief.
Mixed personal and company relief
A notable aspect of the decision is the Court's acceptance that unfair prejudice petitions can seek both personal relief for shareholders and relief benefiting the company.
The key question is whether the petitioner is genuinely pursuing personal relief, such as a share purchase order, rather than using section 994 to sidestep the procedural requirements applicable to derivative claims. Consistent with Re Coinomi, issues concerning mixed relief will generally be managed through case management, rather than Strike Out applications.
Practical implications
For minority shareholders, the decision confirms that allegations of asset diversion or misuse of company funds may support an unfair prejudice petition, even where the shareholder's loss mirrors that suffered by the company.
The case highlights the importance of ensuring that a genuine personal remedy remains central to the petition and that any company facing relief supports rather than replaces that remedy.
For respondents, the judgment suggests that reflective loss arguments alone are unlikely to defeat an unfair prejudice petition at an early stage where a claimant is genuinely seeking relief under sections 994-996 CA 2006.
Key takeaway
Sandycombe reinforces the distinction between the reflective loss rule and the unfair prejudice jurisdiction. Shareholders may pursue unfair prejudice claims arising from asset diversion and similar misconduct even where the loss reflects loss suffered by the company. The focus will be on the nature of the relief sought, rather than whether the company could also bring its own claim.
