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Industry Updates

Exploring the Relationship between Unfair Prejudice & Derivative Proceedings

21 Jan 2014

The often uncomfortable relationship between unfair prejudice and derivative claims was considered by the British Virgin Islands ("BVI") Court of Appeal in Andriy Malitiskiy et al v Oledo Petroleum Ltd 1.  The appellants wanted to bring both a derivative claim (in which they sought corporate remedies) and an unfair prejudice claim (in which they sought personal remedies as shareholders).  

The facts, in outline, were that the appellants each owned half of Oledo Petroleum Ltd ("Oledo"), a BVI company at the top of a chain of filling stations in the Ukraine.  A Mr Adamovsky owned the other half, and was the sole director of Oledo.  In 2009 the parties agreed to separate, and to sell Oledo's business.  This they did, for US$71.5m, but Adamovsky transferred the entire sum to an account in the name of his own company, leaving Oledo an empty shell.  In their unfair prejudice case, the appellants sought compensation for the diminution in value of their shares.  In their derivative claim, they sought to claim against Adamovsky and his company in the name of Oledo, to recover the US$71.5m.  At first instance, provisional permission to bring the derivative proceedings was refused (see the postscript below for comment on the manner in which the derivative claim was launched) on the bases, among others, that the unfair prejudice action was capable of giving the appellants everything they could obtain derivatively. 

The Court of Appeal's starting point was that an aggrieved shareholder may well have a choice of remedy available to him, and that whilst the availability of an unfair prejudice claim was a highly relevant factor, it was not an automatic bar to a derivative action.  Accordingly, the court would not refuse permission to bring a derivative action simply because an unfair prejudice claim was also available.  The court would, however, refuse permission 2 where all that could be achieved in the derivative claim could be achieved in an existing unfair prejudice action.  The better course was to allow only one to proceed, and not to consolidate the two.  As to the appellants' contention that they were seeking different remedies, each of which could only be sought either derivatively or via the unfair prejudice route, the court was not persuaded: it agreed that both remedies were available, but found that they were inconsistent because if the company recovered its loss (via the derivative claim) there would be no diminution in value which the appellants could recover qua shareholders.  

Postscript

What do you do if the derivative claim you want to bring requires an ex parte application for a freezing injunction?  How does the court deal with all the matters it must take into account before granting permission, for example the views of the company's directors, when investigating those matters will render the ex parte relief nugatory?  The statute is silent, but the first instance court adopted the sensible and practical approach of granting preliminary leave, enabling the injunction to be obtained, then having the matter return for an inter partes hearing.


1 BVIHCMAP 2013-0006

2 Following Franbar Holdings Ltd v Keran Patel et al [2008] EWHC 1534

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