Company law - shareholder disputes

Legal costs

The company is a legal person separate from its shareholders. Legal costs in shareholder disputes should not be "put through" the company unless genuinely the costs of the company as explained below. This means shareholders in a dispute must bear their own legal costs - and VAT.

Stopping others putting costs through the company

If you are a minority shareholder taking issue with the shareholders in control of the company who you suspect are or may be using the company's resources in the dispute with you there are a number of things you can do during or in anticipation of litigation.

1. Seek undertakings from the company that it is not:

  1. expending company funds on substantively defending or responding to you / your claim; or
  2. funding the legal costs of any of the shareholders.

If the requisite undertakings are not provided, it will then improve your prospects in applying for any injunctive relief.

2. Make an application to the court to recoup funds paid by the company in the scenarios just mentioned; or

3. Bring an application to strike out paragraphs of the company's defence which show it to be taking an active position in the proceedings.

Limited role of the company in shareholder disputes

The role of the company in shareholder disputes, for which company borne legal costs will be appropriate, should be confined to such tasks as

  1. acknowledging service of proceedings in which it becomes a party, albeit passive
  2. giving disclosure of documents when required to do so (Re a Company (No. 004502 of 1989), ex parte Johnson [1991] BCC 234),
  3. explaining in pleadings what it understands the factual position to be based on corporate documents
  4. facilitating any court ordered relief such as a buy-out of shares or an investigation into the company's management and affairs
  5. making submissions as to the form of any order affecting the company to be made by the court.

But to reiterate: the company's money must not be used to run an active defence to the allegations which are levelled against and between shareholders.

Reality check

The above is relevant from the outset of any dispute, not merely from commencement of litigation. For many, the costs of legal action, and VAT, make achieving a re-balance very difficult. Strength or weakness of personality and interest or disinterest in business affairs, can make a significant difference to prospects.

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