Indemnity Costs Orders Under Unfair Prejudice Petition?

Company Lawyer, Vol. 25, No. 118, 2004

Posted: 28 Feb 2004

See all articles by Arad Reisberg

Arad Reisberg

Brunel University London ; Brunel University London - Brunel Law School

Abstract

As litigation is expensive the remedy provided by section 459 Companies Act 1985 (known also as the unfair prejudice remedy) will be of little use to a shareholder who lacks the financial funds to make use of it. Normally an action under section 459 will involve a shareholder seeking to protect his rights as a member and therefore the Wallersteiner procedure, whereby a shareholder may apply to the court for an order that the company indemnify him or her with respects to costs, will in principle not be applicable. But this will not invariably be the case as it is clear that conduct falling within section 459, as being unfairly prejudicial, can also constitute a wrong against the company and thus be the subject matter of a derivative action. The question is should the Wallersteiner procedure be available for a shareholder in such a case?

In the recent case of Clark v Cutland Lady Justice Arden made some highly interesting remarks regarding costs in a section 459 petition. Although these remarks regarding costs were provisional and rather confined, some initial conclusions, nonetheless, can already be made. If this case is followed, it is clear now that even in situations where the relief sought is claimed under section 461 Companies Act 1985, the important factor for the purpose of determining where the costs should fall is for whose benefit the relief is sought. If, as in Cutland it is the company, then it is now open for a shareholder to seek a recovery order against the company for payment to him of any cost incurred by him. But was the court correct? Or on a wider context, what should be the critical factor or factors that should determine whether a petitioner in a section 459 petition may be entitled to an indemnity cost order?

The paper submits that the stance of the Court of Appeal in Cutland is to be welcomed. Although in section 459 proceedings the company is not usually ordered to pay any of the costs, there are circumstances under which granting such an order would be justified. Since the relief sought in Cutland was sought for the benefit of the company, and there was a derivative action in the background with which the petition had been consolidated, there was no good reason why a petitioner should not obtain an indemnity order with respect to costs. At the same time, the paper argues, the test provided by the Court of Appeal may be of little help when proceedings involve both personal and derivative causes of actions, as the relief sought is not indicative of the wrong alleged in the action. It may be personal, derivative or both.

The paper puts forward an alternative test whereby, in such circumstances, it would be required that both the nature of the wrong alleged and the nature of the remedy sought would be the critical factors that should determine whether a petitioner should be entitled to an indemnity order under section 459 proceedings. The paper submits that this is a fairly straightforward test to apply. If the proposed test will be followed, it is likely that some essential consistency and clarity may be restored, as this may help maintain an important distinction between personal and derivative actions.

Keywords: indemnity costs order, section 459 Companies Act 1985, derivative action, England

Suggested Citation

Reisberg, Arad, Indemnity Costs Orders Under Unfair Prejudice Petition?. Company Lawyer, Vol. 25, No. 118, 2004, Available at SSRN: https://ssrn.com/abstract=508202

Arad Reisberg (Contact Author)

Brunel University London ( email )

Kingston Lane
Elliott Jaques Building
Uxbridge, Middlesex UB8 3PH
United Kingdom

HOME PAGE: http://www.brunel.ac.uk/people/arad-reisberg

Brunel University London - Brunel Law School ( email )

Kingston Lane
Elliott Jaques Building
Uxbridge, Middlesex UB8 3PH
United Kingdom

HOME PAGE: http://www.brunel.ac.uk/people/arad-reisberg

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