Minority protection


Wrongs to the company

What happens if a wrong is done to the company but majority decide not to sue? Exacerbated if the directors are the majority also. 

Can have class rights and fraud on the minority. These are very specific though.

If theres a wrong done to the company, when can a minority bring an action on behalf of the company? What if theres a wrong done to the minority themselves?

Wrong done to the company- CL had two principles. Proper plaintiff principle- wrong done to the company, company must be plaintiff. Majority rule principle- if majority dont want to bring action that is the end of it. 

Foss v Harbottle 1843- if apply rule literally there is a danger if the directors are the majority. 

CL devised an exception- Right to bring a derivative action- minority can bring action on behalf of the company. 

Prudential Assurance 1982- exception. Provided you can show fraud by those in control. Might be able to bring derivative action. Only exception. 

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Derivative action

Protects shareholder interest. Doesn't apply if the company has no power to do the act, and cannot be ratified by the majority. Anyone can bring an action. Also doesnt apply if the breach required a special resolution and didnt have one. Not exceptions, just doesnt apply. 

Need to apply to court to be allowed to bring a derivative action. 

Fraud is common law fraud- Cook v Deeks 1916- Directors negotiated a contract for the company and took for themselves.

Includes equitable fraud- Daniels v Daniels 1978- breach of duty which benefits directors in breach. Dont need to prove purpose. If no benefit, no fraud for breach- Re Downs Wine Bar 1990. 

Control is difficult- in large company with thousands of shareholders, can control with less eg 30%. You dont automatically get the right. 

1) if independent body of shareholders (third group) who dont want it to be brought- Smith v Croft 1987. 

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Derivative action

2) is there a better alternative? Remedy under s994- unfairly prejudicial conduct. For individual shareholder. May be better- leads to buy out. Mumbray v Lapper 2005- what would an independent board of directors do? 

3) simply not a fit person to bring it. Might be a personal vendetta. 

Very imprecise. How do you get through pre-lim trial? Prudential took 80 days. 

Company Law Review thought CL should be replaced. S260 CA - exclusive. Common law is gone. 

Limits scope of actions. Now only available against directors, not another person. If there is knowing assistance you can go for knowing assistance for them as well. Limited to members. Can be an executor or a deceased member. Company are the defendant. 

CL didnt go away- as double derivative action- holding company owns all shares in subsidiary. Wrong done to subsidiary. CL allows X- a minority member of the holding company to bring an action on behalf of the subsidiary. 

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Derivative action

Has this been preserved? Universal Project Management 2013- does CL survive the act? Said yes it does. Said if Parliament wanted to outlaw them they could've, but they didnt. Misuse of corporate opportunity so it was allowed. 

Abouraya v Sigmund 2014- he agreed with above but wasnt in fraud.

Bhullar v Bhullar 2015- judge applied the same test. Allowed for double derivatives. Was in fraud. Said s994 wasnt a realistic alternative. 

Who funds a derivative action? Bhullar v Bhullar 2015- wanted a pre-emptive indemnity order. Wanted company to pay costs whatever the result. Has power to do that but there are dangers in it. Gives the applicant a blank check. May not settle if they have the order. More sensible to have staged indemnity order. Best left til the end of the trial. Halle v Trax 2000. 

99% are going to be under the act. 

Stage 1) application for permission to continue. If doesnt show a case, the court must get rid of application. Written and done by the petitioner only. Not normally thrown out at this stage. ss3- if not thrown out, may adjurn to allow for evidence to be found. 

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Derivative action

The company- not the directors- puts in evidence. Wishart 2009- established that. Not a main trial but the court needs to take a view. 

Hughes v Weiss 2012- are there good prospects for the action? 

s263- ss2- permission must be refused if a) that someone acting under s172 (duty of loyalty) would not continue. 

Courts take a very restrictive view. Wishart and Stainer- only operate that if no director would consider it, if some might, they'll consider it- Franbar v Patel 2008. 

Stimpson v Southern Landlords 2010- only case where failed to get over this hurdle. Case wasnt realisitically arguable, wouldve been injustice. 

ss3- factors to take into account- must be satisfied that they apply. a) good faith- from CL. CL case- Barnett v Duckett 1995- dispute between son and mother in law over divorce, as family company. Court said he's obssessed, not fit to continue. 

Wishart- as long as primary intention is to benefit the company, doesnt matter if you get benefit as well. 

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Derivative action

b) is it worth pursuing on the balance? Franbar v Patel 2008- prospects of success, how likely to recover damages? How much would it effect the business? (publicity). Costs. What would happen if the action failed?

Mission Capital v Sinclair 2008- held whole thing was speculative. Too much risk.

Whats the burden of proof? No single test, has to be more than prima facie. They suggested balance up risk with amount that may be recovered. 

Kiani v Cooper 2010- claim was for £296'000. Some evidence of breach and if money was recovered the company would go from insolvent to solvent. Allowed case to proceed. 

c) less important and d) also. Franbar v Patel 2008- said question was is the company being improperly prevented from bringing the action?

e) has company decided not to pursue? Kleathios v Paphitis 2012- company had decided not to pursue the action for good commercial reason. 

f) important- is there a better personal action/alternative? There are 2 personal actions under 

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Derivative action

s994 CA and 122(f) IA. May be damage to the shareholders also. They are exit routes, want to get your shares bought out. Would it be better for that to happen? Under s994- can also get damages (rare) and maybe paid to company. Will be costly for individual shareholder. 

Franbar 2008- said s994 would better as the real dispute was over the value of shares. 

Kleanthos 2012- what he wanted was to get out. 

Fanmailuk.com v Cooper 2008- said if s994 action was successful, petitioner would become majority shareholder and so wouldnt need derivative action. 

Kiani v Cooper 2010- could get money for company under s994 but would be very indirect way. Should use derivative route as was direct. 

Wishar and Stainer- had same approach. 

Phillips v Fryer 2013- considered merits of 2 claims and were evidential differences under s994. They were different points. 

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Derivative action

Langely Ward v Trever 2011- remedy under s122 of IA is winding up. Decided liquidation was best solution to dispute as was deadlock company, equal shareholders and directors. 

Cant bring derivative action if you can show you have majority control- Bamford v Harvey 2012- no need for one.

Concentrate on B and F. 

ss4- shall have regard to members views who are independent. Not defendants and not bringing the action. Carries forward common law. 

There are variations. Same procedure applies if someone picks up someone elses derivative action. 

Same thing happens if company starts action, pulls out and member wants to take over.- s262 and 264. 

Nothing about costs in here. Have to go back to Bhullar v Bhullar- dont like pre-emptive indemnity orders. May give conditional- Wishart and Kiani. 

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Derivative action

Not personal- a company action. Recovering money for company.

Personal actions-

Can shareholder bring claim against director for breach of duty? Reflective loss- loss of company reflects to you.  Argued in Prudential Assurance- tried to argue reflective loss. CoA said this wasnt allowed. 

HoL Johnson v Gore Wood 2001- approved above principle. Against accountants for negligence. Company settled the action. J thought settled for too low terms. He brought claim against accoutants for damage to his shares. No liability for reflective loss. You take the risk as a shareholder. 

Exception- Giles v Rhind 2003- wrong done to company, but effect of the wrong left insolvent company. Company couldnt afford to bring action. Shareholder allowed to bring claim instead. 

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Just and equitable winding up

Statutory remedy- s122 of IA- winding up on the just and equitable ground. Been around a long time. Used to be for fraudulent companies. Became used in a wider sense. Comes from s36 of Partnership Act. Not a partnership but a company, but in reality is a partnership and so can wind up a company. 

Ebrahimi v Westbourne Galleries 1973- partnership turned into a company. 3 of them, all directors and shareholders. Run as if still partnership. 2 fall out with 3rd. Under CA you can dismiss a director under ordinary resolution. They dismiss the third legally. He applies under s122 for a winding up on just and equitable grounds, as wouldnt have happened in a partnership. HoL said formed on the basis of mutual participation like partnership. Fundamental right had been breached and so was equitable to wind up company. 

Now described as a quasi partnership. 

If found to be a quasi partnership it can be formed that way or become one- Straham v Wilcock 2006- evolved into one. 

Croly v Good 2011- asked if relationship was personal rather than commercial. 

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Just and equitable winding up

Doesnt have to be equal rights- Quilan v Essex 1996- man was a minority. Junior partner had some management rights. 

Fisher v Codman 2006- family company with 4 partners. A and B died and C and D and E got shares. Could E bring a s122 petition? Yes as there was a family personal relationship. Reasonable to impost equitable obligations. 

Zavahir v Shonklemon 2016- company had no business left. Clear breach of duty by the director- dividends paid from improper funds. Judge didnt let case proceed, under no director wouldve brought the action. Majority wouldnt either. Didnt allow as company had very few assets. £150'000 of costs incurred, so even if they were successful theyd only get £138'000 back. If sought indemnity from company, then company would fail. Would be catastrophic if they'd lost also. If done risk benefit analysis, no prudent director would bring the claim. 

Can be quasi partnership company but can cease to be- Thurd v IVE Ice Storage 1998- founded as partnership company but personal relationships had gone so s122 didnt apply.

What needs to be shown for a successful petition? Deadlock companies- if relationship broken down then winding up might be only solution- Worldhams Park Golfcourse 1998. 

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Just and equitable winding up

O'Neill v Phillips 1999- most important case- Hoffmann looked at s121. Not enough that you just want to get out. No such thing as no fault divorce. Needs to be something that makes it in equitable to carry on- eg clear exclusion from management or other course of conduct. 

Winding up- voluntary suicide. Last resort. Company ceases to exist. Get a valuation for your shares. Get an assets valuation. Might not have any assets. Dangerous. Only way can be used- petition for a winding up, goes into liquidation and by company from liquidator as a going concern. Clever if you have the money. 

s125 IA- may refused a petition. It is discretionary remedy. On two grounds- 1) alternative remedy which is better to pursue. eg Unfairly prejudicial conduct. 2) if otherside make fair offer to buy you out. Only works if offer is fair. 

Re Abbey Leisure 1990- offering to buy petitioners shares at discounted price, less than assets value as minority shareholder. In equity thats not fair. That was thrown out. 

CNC v Almeida 2002- offer to buy petitioner out on break up value. Privy Council said not fair offer. If they buy you out they carry on the business and get going concern price. Would give defendants huge windfall. They refused. 

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Just and equitable winding up

s122- drastic, limited, was producing unfair results- Ebrahimi. 

Alternative remedy- now main remedy- had to show economic oppression- Westbourne Galleries- not economic oppression. 

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Unfairly prejudicial conduct

s994. Most litigated section of last 30 years. Exit route- seeking to be bought out. 250 reported cases. 

3 requirements for a petition- 1) must relate to affairs of the company 2) must be prejudicial to the members- need to be a member- affect in capacity as a member 3) must be unfairly prejudicial. 

1) affairs of the company- Re A Company 1987- allegation was majority shareholder paid off companies bank loan but had taken the mortgage/security as payment for her home. Claimed to be unfairly prejudicial. Said doesnt relate to the company. Relates to personal. Company still owed the money the same.

Arrow Nominees v Blackledge 2000- majority shareholder was companies main supplier. Froze supply of goods as hadnt be paid. Not unfairly prejudicial conduct as acting as supplier, not member. Purely a business deal.

Gross v Rackind 2005- held affairs of the subsidiary could be regarded as affairs of the holding. 

Hough v Hardcastle 2006- affairs of company that controlled another company were sufficient so quite wide. 

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Unfairly prejudicial conduct

Does it relate to management structure? Oak Investment 2010- defendant had de facto management control even though agreed not to. When petition came against him, he said not affairs of the company as had done nothing to the structure. CoA said question is- did they interfere in the management structure? Substance, not form. 

Whens corporate or personal dispute arise? Broken agreement, normally personal dispute between shareholders. Graham v Every 2014- 4 shareholders, 1 was retiring and agreed shares would be split between other 3. He only transferred them to 2. The 3rd brought a claim as unfairly prejudicial conduct. Was this company affairs? Judge said no, just a contract case, not company. CoA said way of shifting management structure and control as small company. Arden said unfair as paid by dividend not salary so unfair. 

Majority can never use s994. 

Re Legal Costs Negotiators 1999- majority can never bring that petition as control rules. 

Alvone Developments 2006- allowed s994 petition by majority. Minority were being deliberately destructive and obstructive. Held to be affairs of the company. 

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Unfairly prejudicial conduct

2) must affect you as a member. 

JE Cade 1992- family company ran a farm. Petitioner was the freeholder. Agreement farm paid no rent and no formal tenancy. Majority sharedholer asserted protected tenancy. Petitioner brings action under s994 alleging unfairly prejudicial conduct. Said no, affected him as a landlord not a shareholder. Said quite severe after. 

Fulham FC v Richards 2011- CoA held if there is an arbitrator agreement and the remedy under s994 would be available under arbitration, that takes precedence so can oust s994. 

Take wider view.

Interactive Technology Corporation 2016- allegation was defendants had caused company to engage in unnecessary litigation. Affected him as a member as it reduced assets, which reduces value of shares.

R and H Electrical 1995- petitioner wasnt a shareholder, technically a creditor. Invested through loans rather than shares. Appointed to board as part of deal from loan. They sacked him. Said unfairly prejudicial conduct. If you look at economies of company, just counted investors 

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Unfairly prejudicial conduct

they didnt distinguish. Needed to be on board to protect loan so they allowed it. 

ONeill v Phillips 1999- could an employee shareholder do it when employment effected? Depends on facts on how much he was involved in management structure. Involved in management, said promised more shares he didnt get. That was allowed. 

In general have to be member. If member, can complain about things that happened before you were a member- Lloyd v Casey 2002. 

Shareholder who agrees to sell can also bring an action, even when bound to sell to someone else- Baker v Potter 2005. 

What amounts to unfairly prejudicial conduct? 

O'Neill v Phillips 1999- O, an employee of company. P owned. Given 25 out of 100 shares. Appointed as director. P goes into semi retirement so O takes over running of the company. He gets 50% of the profits. Guaranteed companies bank account. 1989 increased negotiations to increase shares to 50%, but never concluded an agreement. 1991- big disagreement. P comes back into control, removes N as director, sacks him and gives him no shares. 

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Unfairly prejudicial conduct

Doesnt give him 50% of the profits either. N bringing s994 petition. Said breach of profit sharing agreement. Hadnt been given extra shares. CoA allowed petition on basis of legitimate explanation of above things. Was a mantra at that stage. HoL said no. Laid down criteria. Widely applied Westbourne Gardens. Company law based on agreement about how to run. Equitable considerations needed as outlined in Ebrahimi. Contract v Equitable. Must be breach of one for unfairly prejudicial conduct. Could be breach of duty. Then laid down test- 'would the exercise of the power in question be contrary to what the parties, by words of conduct have actually agreed.' Not legitimate expectation. Has to be breach and then legitimate expectation. No legitimate expectation have, as no concluded agreement. Would've enforced an obligation that had never been agreed to. In a nutshell, what unfairly prejudicial conduct is. Need to apply that test. 

No fault exit. Not enough to no longer like each other- Pheonix Office Supplies 2003- first case post ONeill v Phillips. 

Non equitable cases- what do you need to show to show breach? Sustained breaches of duty by directors- Re McCarthy Surfacing 2009- failed to distribute profits and took money without authority. 

Preventing company from doing what it was formed to do. Must be unfair. 

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Unfairly prejudicial conduct

If public company- cannot be equitable considerations. Re Astec (BSR) 1998- public company. Equity is personal so cant have with 500 shareholders.

Constitution- will not apply equitable considerations. People need to know whats going on. Can extend to defacto situations. 

Re Migration Solutions Holdings 2016- petitioner had knowingly entered into subservent position. He cant turn around and claim equitable considerations. 

Equitable- Ebrahimi 1973- some underlying agreement. 

Richards v Lindy 2000- had been partners in partnership. Business incorporated. L took 90% of the shares. R then removed from all management so brought a petition. Court said yes. Although only 10%, had management agreement from partnership. Had agreed not to take from company until capital had grown. 

Croly v Good 2010- C employee initially, agreed to take shares rather than salary. Created equitable situation as they never paid dividends on his shares. Took all dividends as directors fees. Abuse of underlying agreement. 

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Unfairly prejudicial conduct

Life rarely good v bad. What about petitioner conduct? Does that mean they can bring or not bring petition?

LSE 1986- college. 2 members. Clear prejudicial conduct by majority shareholder. Petitioner also had started appropriating pupils. CoA said his conduct was relevant but not decisive. 

Judge v Badh 2014- quasi partnership company. J propositioned B's wife. B excluded J from management. Paid no dividends on shares and issued new shares to his son, which reduced J's holding. Prejudicial conduct but was it unfair? It was a personal issue that didnt relate to the company so the case proceeded.

Interactive Technology Corp 2016- petitioner sought to buy out the minority. Judge refused, as petitioners conduct had caused the breakdown. The bad conduct of the defendants was short lived. 

Just an issue not a game changer. 

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Unfairly prejudicial conduct

What are the remedies? s996. Court has a blanket cheque- can make such order it thinks fit. There are 5 specific orders, not all.

  • Can regulate conduct in the future (not really used).
  • require company to refrain or do- injunction or specific performance (rare)
  • authorise civil proceedings on companys name- derivative action
  • require company not to change articles
  • 99% of all cases- provide for purchase of shares- a buy out/exit route. 

Theres no market to get out of a small company so no other exit route really.

Re Full Cup International 1996- there was the conduct by company had no assets so made no order. 

Sometimes petitioner might have to buy out the majority. Very rare- Nuneaton Borough FC 1991. 

Robertson 2009- petitioner owned 50% of shares. Judge said other 2 caused the problems, so why should petitioner sell? 

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Unfairly prejudicial conduct

He would be better manager on his own so he bought out the others. 

In practise 90% of fights are over how much to buy out for. No easy way to value private company shares. 

Re Bird Precision Bellows 1986- CoA said draw distinction between shareholding in quasi partnership, where you have an unwilling seller, he should get the full value of the shares. (assets valuation). If genuinely ordinary relationship should get discounted value as minority holding is worth less than majority. 

Challenged- Re Addbins 2015- said no general rule, each case is on its facts.

Re Braid Group 2016 Scotland- if theres a shareholder agreement on how to value, then that is to be applied. 

What date do you value shares?

Profinance Trust v Gladstone 2002- general rule value at the date of order of valuation. If you can show that value is low from conduct, you can back date to before conduct began or if there is a disapproval of defendants conduct- Shepherd v Williamson 2010.

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Unfairly prejudicial conduct

Not unfairly prejudicial conduct if there has been a fair offer to buy you out. If don't accept it you will get squashed in costs. 

Unfairly prejudicial conduct- courts have derived principle now that not unfairly prejudicial conduct if a fair offer to buy out has been made. Developed in the 1990's.

ONeill v Phillips 1999- Hoffman- whats a fair offer? Depends upon entitlement of petitioner. Normal rule is that going concern value, rather than assets. No petition, company continues and defendant have benefit. Is whats given fair in those circumstances? 

Who does valuation? No share market for them. Hoffmann said needs to be complete and expert. Each side has right to make representations to the expert. 

When do you have to make offer? Offer must be made within reasonable time of the petition. Otherwise will get penalised in costs if leave it too late. 

If you can show valuer is biased can be set aside- Re Benfield Greig 2002- must be independent expert. 

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Unfairly prejudicial conduct

Fairness depends entirely on the facts. Harborne Road Nominees v Karashi 2011- said no general principle, other than must be fair. No single test. In case of deadlock company. The wrong was that one had effectively taken over the company and excluded the other from participation. Would be injust to say petitioner must take offer. 'Does the offer give the petitioner what he should expect from the case?' 

Re Annacott Holdings 2013- CoA concentrated on balancing rights of the parties. Musnt give either side a windfall or unfairly benefit them. The petitioner is an unwilling seller. Should get fair value. Might be going concern value, not always discounted value. 

Putting the causes in context as some of them overlap. 

Between unfairly prejudicial conduct/equitable and just winding up- 

1980's everyone put in s994 and s122 IA. Chancery division issued a practice direction. s122 should only be pleaded if preferred remedy or only option. Must want liquidation. Otherwise must use s994 if you want an exit. Can't use s122 as a sweeper. Still the practise. 

Re Guidezone 2000- court said if petition for s994 fails, then theres no way you'll get s122 either.

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That seemed to take it too far. 

Re Neath Rugby 2009- said Guidezone was wrong. The two are not exactly matched. There is an overlap though. Where s994 not available but might get s1220 deadlock company that doesnt work. Not really unfair conduct- should wind up. Unsuccessful attempts to remove a director. Not unfairly prejudicial as nothing happened. Might be equitable to wind up. If impossible to carry on company as intended. Not in itself unfair. But might wind up. So s122 still has life independent of s994. Basically when you cant show unfairness. 

If preferred winding up, need to show that. 

Harding v Edwards 2014- s122 was a much better bet. Company owned by 3 sisters who got shares from father. Mother was 4th shareholder and wasnt involved as ill. Sisters didnt get on. Couldnt agree on anything. Financially no one could afford to buy out the others. Mother going to die. Couldnt do a buy out so s994 wouldnt work. Only solution was to wind up company and sell under s122. Pragmatic thing. 

Exceptions- s994 is the most important. Even then s122 is discretionary, dont have to wind up. 

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Shah v Shah 2010- petitioner owned 1/3rd of shares and brother 2/3rd. Minority shareholder excluded from managment. Seeking a winding up as preferred remedy. Court said company very profitable, very well run and would be very inappropriate to wind up. Minority wouldve been held to ransom. 

Always start with s994. 

Petitions and derivative actions- 

Sometime dont allow derivative actions if not the best cause. Courts have said situations where both might be available. Odd as ones personal and ones corporate. 

Mismanagement can be unfairly prejudicial conduct and could lead to derivative action as breach of duty.

Lowe v Fahey 1996- shareholder wanted to go under s994 as wouldve got legal aid. Court said thats no reason why they couldnt overlap.

Anderson v Hogg 2002- took the same view as above. Could go under either. 

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Re Charnley Davis 1990- Millet- if specific allegations of breach of duty should really be under derivative action. Whereas under issue of general mismanagement can go under s994. Distinguish between specific wrong and general, may include breaches. 

Re Chinese Corp 2004- said Millet was right, if breach of duty need to quantify the damage under s994. 

What happens if win under s994? 

Court might order compensation to be paid to the company. Have same result as if had come under derivative.- Clark v Cutland 2003. 

No hard and fast rule. Maybe no loss to the company so court wont make an order- Rock Nominees 2003. 

If no loss may still be unfairly prejucidial conduct which may lead to a buyout- Re Baumler 2005. 

All this assumes company is solvent. May be insolvent. In that case, compensation payable goes to creditors. Courts then say member cant bring an action as they wont benefit. 

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The petition will be thrown out. 

Gamelstaden 2007- however in this case, the member/petitioner was a creditor also. They allowed it.

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these notes are useful to a certian extent, as i could not understand them fully.

this was not due to content but due to the individuals note taking style, understandable as the resource was made to help them foremost.

i cannot find the citation or case for Re Chinese Corp 2004



Thank you for sharing this valuable knowledge. I've been struggling to come up with many questions on this subject. I'll stand by your side! play who are ya game

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