Profile Partners Ltd, Re

In unfair-prejudice proceedings, company funds must not be used to finance the controlling members’ defence of the petition or to confer an unfair litigation advantage. A company may pursue its own claim or counterclaim where it acts for a proper corporate purpose, but costs must be satisfactorily apportioned. Timing, overlap of allegations and failure to distinguish parties or losses may show that proceedings form part of the shareholder dispute. The same principles may apply to subsidiary funds. Interim relief is assessed under the American Cyanamid criteria, with preservation of the status quo particularly important where company assets may be dissipated.

Mr Michael Gott, a 15% shareholder in Profile Partners Limited, brought proceedings under section 994 of the Companies Act 2006 and sought injunctions restraining the use of group funds for the respondents’ defence, counterclaims and disputed consultancy payments.

An earlier interim decision had restrained expenditure pending the return date. The central issues were whether the contractual undertakings and the company-law restriction on using corporate money in shareholder disputes were engaged, and whether interim injunctions should be granted.

1. Outcome. The application was granted. Injunctions were granted restraining expenditure connected with the petition, counterclaims, German proceedings and disputed invoices.
2. Corporate funds. The company’s funds could not be used to finance the individual respondents’ defence or confer an unfair litigation advantage. Genuine corporate claims were not automatically barred, but the respondents had made no satisfactory apportionment between corporate counterclaim costs and defence costs.
3. Proper purpose. Applying Jones v Jones and Pollard v Pollard, the relevant question was whether proceedings were brought for a proper corporate purpose in the company’s interests. The late counterclaims, their overlap with the defence and German claim, and the failure to distinguish parties, duties and losses showed that they were part of the shareholder dispute. The principle applied equally to subsidiary funds used for the majority shareholders’ benefit.
4. Interim relief. There was a serious issue to be tried concerning the invoices and consultancy deed. Under the American Cyanamid criteria, damages were inadequate because company expenditure could confer an unfair litigation advantage and reduce funds available for a possible buy-out order. The respondents had not shown uncompensable prejudice. Preservation of the status quo therefore favoured relief.