Question: When is the law not the law?
Answer: When everyone in the profession, including judges, gets it wrong in court and in every practitioner text for more than 40 years.
The decision in THG Plc v Zedra Trust Company (Jersey) Limited
THG v Zedra is a rare and wonderful example of how statutory law, our understanding of it, and its application by the courts, can change over time. The change this case brought was however rarer than most, because, unlike other cases, it did not bring a change in the common law.
THG v Zedra had a narrow focus on longstanding statutes and their correct interpretation. It turned on its head more than 40 years of received wisdom about the application of limitation periods to petitions for unfair prejudice under s.994 of the Companies Act 2006 (and its statutory predecessor under the Companies Act 1980).
As Lord Justice Lewison identified in the unanimous Court of Appeal judgment, it was indeed received wisdom throughout the profession that no limitation periods applied under statute to unfair prejudice petitions. The judge himself listed numerous cases across the Senior Courts over the decades where this received belief was either expressly stated or was otherwise implicit within the judgment. He also cited five notable practitioner texts and two Law Commission reports holding forth with the same received understanding of this point.
As Lewison LJ then went on to explain, they were, however, all entirely wrong. The court held that petitions for unfair prejudice under s.994 are, and have always been, subject to statutory limitation periods under the Limitation Act 1980!
How did the court reach this conclusion?
The reasons for this outcome are surprisingly straightforward and likely unassailable by future argument.
The right of action to petition for unfair prejudice has no origin in common law. It is entirely a creature of statute: first in the form of “oppression” under the Companies Act 1948, and now in the current formulation of “unfair prejudice”, previously under the Companies Act 1980, and now as restated in s.994 of the Companies Act 2006.
Further, the potential remedies for this statutory right of action are allowed solely by the same statute (under s.996 of the Companies Act 2006).
Section 38(1) of the Limitation Act 1980 extends the Act’s scope to any “action” to include “any proceeding in a court of law” – with a petition for unfair prejudice falling well within that ambit.
Moreover, case law has long recognised that rights of action and their remedies under statute are “specialities”. And the limitation period for a specialty is there in plain English in s.8 of the Limitation Act 1980:
“(1) An action upon a specialty shall not be brought after the expiration of twelve years from the date on which the cause of action accrued."
"(2) Subsection (1) above shall not affect any action for which a shorter period of limitation is prescribed by any other provision of this Act.”
So, the starting point is 12 years from the date on which the cause of action under s.994 accrued, unless a shorter period applies.
In THG v Zedra, a shorter period did apply, because the petitioner sought a remedy involving money only, meaning damages, which brought it under s.9 of the Limitation Act 1980:
“An action to recover any sum recoverable by virtue of any enactment shall not be brought after the expiration of six years from the date on which the cause of action accrued.”
What is the impact of this decision?
This case is likely to have significant commercial impacts for minority shareholders locked in dispute with the majority and/or a company’s board of directors. It's not just an amusing curiosity for lawyers.
For example, the nebulous concepts of delay, laches and/or acquiescence to unfair conduct have traditionally given rise to expensive arguments in litigation over unfair prejudice petitions. This has been a common arena for tendentious allegations in the past, absent limitation periods, to muddy the waters on a quasi-limitation basis.
At a technical level, the arguments in delay, laches and acquiescence are different to those in limitation, which applies an absolute procedural bar over what might otherwise be a good claim. Ascertaining a limitation period is, broadly speaking, an objective calculation of time once you establish the starting point.
Delay, laches and acquiescence are not the same because they require a qualitative examination by the court of subjective factors, meaning factual events and a party’s conduct, to decide if the petitioner is deserving of relief.
While these arguments will no doubt continue, the certainty of clear limitation periods may well blunt the force of weaker arguments premised on the idea of an “undeserving petitioner” and their alleged lackadaisical conduct. It may lead respondents to proceed in this way with more caution, absent compelling evidence to support the idea that it is too late for relief in a claim brought within the fixed limitation period. Time will tell if this is right.
It is likely that the limitation period for s.994 actions will be 12 years from the date on which the cause of action accrued because in most cases, the petitioner is not seeking damages. The petitioner normally seeks an order to govern the affairs of the company, or to mandate a fair valuation and share purchase of their minority holding by the respondents. This allows the company to move forward without further management strife between the shareholders and directors.
But where the petitioner seeks damages only, then the shorter period of six years will apply, so a potential petitioner must bear this in mind (ie, the remedy may affect the length of the limitation period).