A matter of time for limitation periods: what the decision means for shareholder claims
Importance
The right to raise unfair prejudice petitions under section 994 Companies Act 2006 ("CA 2006") had, for 40 years, been unhindered by limitation periods. Until the Court of Appeal decision in THG v Zedra1 that threatened minority shareholders' rights to bring them outside a set time period.
However, in its highly anticipated judgment, the Supreme Court has recently reversed the Court of Appeal's first appeal decision. In a majority opinion, the Justices of the Supreme Court found that the Court of Appeal had erred in finding that unfair prejudice petitions were subject to a six-year limitation period.
Instead, the Supreme Court disapplied the application of the limitation periods under sections 8 and 9 Limitation Act 1980 ("LA 1980") to unfair prejudice petitions. The only bars to unfair prejudice petitions are based on delay.
This landmark decision underlines what was the historically understood position that unfair prejudice petitions are neither subject to a limitation period, nor arise as a matter of right. The Supreme Court thereby rejected the placing of restrictions on minority shareholders' rights, allowing minority shareholders in future claims that do not uncover prejudicial actions of the majority shareholders until years down the line to still ensure their claim will be heard as long as it has not been unduly delayed.
Facts
The appellant, Zedra Trust Company, was a minority shareholder in the respondent company, THG plc. In 2019, the appellant brought an unfair prejudice petition under section 994 CA 2006 against THG plc and its nine directors, alleging that the company had conducted its affairs in a manner unfairly prejudicial to Zedra, by its directors breaching their duties to act lawfully, in good faith, and for proper purposes.
By way of an application in June 2022, Zedra sought to amend its petition to include the allegations that the unfair prejudice was caused by the respondents' unfair allotment of bonus shares in 2016.
THG sought to argue that the amended unfair prejudice petition, being brought more than six years after the allotment of bonus shares, was time-barred due to the LA 1980. Finding for THG, the Court of Appeal held that Zedra's amendment was time-barred.
Key aspects of the majority decision's rationale
The majority decision outlined to the Supreme Court by Lords Hodge and Richards was based on an analysis of the interplay between sections 8 and 9 LA 1980, with section 994 CA 2006.
Section 8 LA 1980 stipulates a twelve-year limitation period for "actions on a specialty", but section 8(2) limits its application if another shorter limitation period applies. Section 9 LA 1980 then applies a six-year limitation period where the cause of action is to "recover any sum recoverable by virtue of any enactment".
These two provisions raise the questions: (a) what is an "action on a specialty"; (b) would it cover unfair prejudice petitions under section 994 CA 2026; and (c) does section 9 LA 1980 impliedly apply to non-monetary claims, and so also has the capacity of applying to an unfair prejudice petition.
The majority decision explains that the phrase "actions on a specialty", necessary for triggering a twelve-year limitation period under section 8 LA 1980, has no specific legal definition. Instead, the term "specialty" derives from 19th century case law, which gave weight to specific statutory rights and contracts by seal as having an "obligation of higher form". This means that deeds and specific statutory debts were treated as having special status and application between parties merely by principle, rather than arising by agreement.
The Supreme Court observed that a notable string of cases where "actions on a speciality" can be seen to include rights arising under a statute. However, the majority decision identifies that, until the decision of Collin v Duke of Westminster [1985] QB 581, every example of an action on a specialty, which was based on a statutory right or obligation, involved the enforcement of a debt. In the Court's view, Collin was the first observation of the application of the limitation period for actions upon a specialty beyond monetary claims. In his decision, Oliver LJ stated that "[t]he obvious and most common case of an action upon a specialty is an action based on a contract under seal, but it is clear that "specialty" was not originally confined to such contracts but extended also to obligations imposed by statute".
The Supreme Court in THG v Zedra identifies that the differentiating factor in Collin of whether a statutory obligation amounts to a specialty under section 8 is whether it is accompanied with an imposed obligation on the defendant. The majority decision finds that anything short of that, such as the court having a discretion to grant a remedy, will not be subject to the section 8 limitation period. Lord Lloyd-Jones and Lord Briggs agree somewhat with this part of the majority decision, but diverge by emphasising that the distinction given in Collin is rather whether the statute creates a monetary obligation, rather than a non-monetary obligation.
Unfair prejudice petitions are raised as a complaint to the court, who may exercise its discretion to grant a remedy, rather than being based on a right to a debt or enforce an obligation. As such, the majority of the Supreme Court agreed that unfair prejudice petitions are not subject to the section 8 limitation period. This decision was entered despite notable cases involving non-monetary and discretionary statutory remedies that misapplied the rationale in the Collin decision, extending the twelve-year limitation period to a broader class of claims – specifically decisions in Rahman v Sterling Credit Limited [2001] 1 WLR 496 and Hill v Spread Trustee Co Limited [2007] 1 WLR 2404.
The Supreme Court then considered whether an unfair prejudice petition is caught by section 9 LA 1980 if the relief sought includes a monetary claim. The limitation offered under section 9 against claims for "any sum recoverable by virtue of any enactment" encompasses a wide group of monetary claims, such as claims for unliquidated sums, and (in any event) is wider than the statutory debts recoverable as actions on a specialty. The majority decided that a claim under section 994 is not to enforce a liquidated or unliquidated obligation, but to petition to the court to make an order that it deems appropriate to manage the company's affairs. The vast extent of the court's discretion (even where monetary relief is requested) renders it wholly inappropriate for the limitation period imposed under section 9.
As such, Zedra succeeded, with the Supreme Court deciding that in any event that an unfair prejudice petition is not subject to either limitation periods given in sections 8 and 9 LA 1980.
Key takeaways
Despite there being no limitation period for raising unfair prejudice petitions, petitions are still restricted by bars caused by delay. Minority shareholders should not allow their claim to go "stale"; any unjustifiable delay in objecting to, or a representation of acquiescence of, the company's affairs can defeat a minority shareholder's attempt to raise a petition. The mere fact that a limitation period no longer applies does not mean a petitioner can avoid judicial scrutiny for failure to act within a much shorter timeframe when the petitioner had all the relevant information but still failed to raise the petition promptly.
It is also of note that Zedra was not a unanimous decision, therefore leaving potential room for deviation in future case law which practitioners ought to be mindful of.
Further, practitioners are reminded that the scope of the section 8 limitation period goes beyond deeds (for which it is more widely recognised) into the recovery of statutory debts where a shorter limitation period does not apply. However any statutory debt claims also covered by the section 9 limitation period are subject to the shorter limitation period of six years, due to section 8(2), but this is important to bear in mind for the purposes of interpreting the LA 1980.
