Can the Company Pay? – Use of Company Funds in Shareholder Disputes

Can the Company Pay? – Use of Company Funds in Shareholder Disputes

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This is a point that often comes up in practice.  Shareholders are locked in a bitter battle over the ownership of a company, whether as an unfair prejudice petition (where one side says the other has prejudiced their rights as a shareholder), or rarely where one side seeks to wind up the company on a just and equitable basis. Your client (who has hopefully been paying the bills so far) suddenly pipes up and says – why can’t my invoices be issued to the company?

The company is usually a nominal party to these sorts of claims, however the general rule is that it should not participate in, and its funds should not be used on disputes between shareholders, unless it is demonstrably necessary – say for giving disclosure of company documents[i].  The company needs to be joined to these types of claims, so that any order binds the company itself (say that one side buys out the other the company will need to carry out that transaction). It may also need to provide disclosure of company documents that are not accessible to the shareholders or directors, for example access to email custodians who use the company’s servers.  Very occasionally, in complex disputes, the company may require its own discrete advice on issues and in this circumstance, the parties will usually seek the express permission of the Court to agree to this expenditure before it is incurred, although the judgment of Lindsay J in Re a Company (No. 001126 of 1992) [1993] B.C.C.325 indicated that in the absence of the most compelling circumstances proven by cogent evidence, advance approval is unlikely to be granted. It is highly unlikely that the Court would sanction the expenditure of company funds in fighting a petition. Likewise, the use by related companies of funds to fund proceedings on behalf of one set of shareholders is usually restrained (see Gott v Hauge [2020] EWHC 1152 (Ch))

If a party uses or threatens to use the company funds to pay their legal fees, they may be injuncted from doing so, and if payments have already been made without proper board approval and authority, the Court may well make a mandatory interlocutory order requiring the re-imbursement of the funds improperly used.  This is because if the controlling shareholder uses the company’s funds to pay their legal fees, it not only deprives the company of funds that could and should be used to further its objects, run the business or distributed to all the shareholders, but it means that the minority shareholder does not have access to the same source of funds, as invariably they do not control the company’s purse strings.

If the company pays for one shareholders’ advice, then the legal advice belongs to the company, and therefore the other minority shareholder would be entitled to view that advice.

So how do you deal with this point in practice?  One of the first requests usually made by either a prospective petitioner or prospective respondent, is that undertakings are provided that the parties will not use the company’s funds to pay their legal fees or incur additional fees with the company’s existing lawyers (if they have them) advising either party on the issues.  If the undertakings are not provided promptly then injunction proceedings are threatened.  In cases where it is suspected that funds have already been withdrawn from the company to pay pre-action costs then express undertakings are required on that point.  If these are not provided, or later found out to be wrong, then you are back in injunction territory.  My advice to clients is – this is litigation you will have to pay for yourself.

[i] Pickering v Stephenson (1872) L.R. 14 EQ 322 Ch; Re a Company (No.001126 of 1992) [1993] B.C.C. 325 Ch D

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