UNFAIRLY PREJUDICIAL CONDUCT

Meaning of ‘unfairly- prejudicial conduct’ as defined by the courts includes:

  1. i) Exclusion from management;
  2. ii) Allotting shares in breach of pre-emption rights;

iii) Convening a meeting of the company for a date unreasonably into the distant future;

  1. iv) Failure to pay proper dividends;
  2. v) Diverting business away from the company;
  3. vi) Making a rights issue in certain circumstances;

vii) Providing misleading information to a company’s share-holders;

viii) proposing to sell the company’s business at a substantial undervaluation to connected persons; And

  1. ix) using the company’s assets for the benefit of the company’s controlling share- holders and family.

Affairs Treated as Pre-judicial or Discriminatory:

Section 233 requires the petitioner to show that an action prejudicial to his interest is being committed. The following situations have been recognized by the Common Law as pre-judicial or discriminatory against the minority shareholders: (Here, the Common Law means the law laid down by the courts in decided cases)

  1. Where the majority of the shareholders do any act which is not permissible by the Memorandum or Articles of Association of accompany;
  2. Where the act in question is illegal,
  3. Where the company does any act without passing any special resolution (i.e., by

vote of three-fourth of the members of the company), if it is the mandate of the Memorandum and the Articles;

  1. Where the decision of majority constitutes fraud on minority;
  2. Where the articles provide any specific right for any particular type of shareholder, if any deprivation of the right occurs;
  3. Where any wrong caused by the majority of the shareholders controlling the power;
  4. Where the rights of the minority shareholders   are   infringed   by oppression and mismanagement;

Beside these, In Nahdr Shipping Lines Ltd. and another v.. Homera Ahmed and others (2000) 52 DLR 585, the minority shareholders applied for winding up the company under section 233 of the Companies Act, 1994 claiming under certain grounds which were recognized by the Court. Those grounds can also be regarded as affairs prejudicial or discriminatory against the minority shareholders.

The grounds are as follows:

  1. Where the minority shareholders never received any benefit from the Company;
  2. Where they have been excluded to take part in the business, affairs and Management of the company;
  3. Where they are kept in dark about the affairs of the company by the majority Shareholders;
  4. Where no   General   Meeting   of the   company   is   held   after   the Commencement of its business;
  5. Where any   financial   bungling   is   committed by  the   majorityShareholders;
  6. Where the majority shareholders-
  7. a) treat the company as their own personal business; or
  8. b) Receive all the benefits without disclosing the same to the minority shareholders; or
  9. c) Defraud the company and the minority shareholders all the sums earned by the company;

5.3 The Guidelines Upon Which a Particular act or Conduct can be Treated as Prejudicial:

In the UK and Australia the concept is of unfair prejudice. In the case Re Saul D Harrison & Sons PLC (1995) 1 BCLC 49, Neil LJ declared the guidelines as follows in determination of an act as “unfairly prejudicial”:

  1. The words “unfairly prejudicial” are general words and they should be usedFlexibly to meet the circumstances of the particular case.
  1. The section giving relief should not be allowed to become an instrument of oppression nor to stifle managerial decisions.
  2. The relevant conduct of commission and omission must relate to the affairs of the company of which the petitioner is a member.
  3. Prejudicial conduct means causing prejudice or harm to the relevant interest.
  4. Unfairness can arise out of a breach of the petitioner’s legal rights, i.e. those

in the memorandum and articles of association or arising out of the fiduciary duties of directors, or the petitioner’s legitimate expectations.

  1. Serious mismanagement of a company business can constitute unfairly Prejudicial conduct.
  2.   Directors exceeding their powers or exercising them for some illegitimate or Ulterior purpose would allow a shareholder to complain.

The word “prejudice” is wider and general than the words “unfairly prejudicial” used in the English and Australian sections. The circumstances in which this will apply cannot therefore be categorized.

The shareholders/directors will generally have fallen out with each other.  The unfairly prejudicial conduct often takes the form of an exclusion of one shareholder/director by another from the affairs of the company. On other occasions, it arises because of the misappropriation by one shareholder / director of property or funds belonging to the company or of a business opportunity that might have been enjoyed by the company. In other cases it might take the form of wrongful dealings with shares, improper dividends, salary or other payments or other improper conduct of the company’s affairs.

This legislation gives the court very wide powers to control the conduct of the affairs of the company and its shareholders / directors. Such proceedings regularly result in the court ordering that one shareholder / director should purchase the shares of another at a value determined by the court to be fair in the circumstances.

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