Royal Court of Guernsey dismisses a substantial unfair prejudice application in CLO HoldCo Limited v Highland CLO Funding Limited [2023] GRC061

Judgment has been handed down by Her Honour Hazel Marshall KC Lieutenant Bailiff.

CLO HoldCo Limited (“CLOH”), a minority shareholder in Highland CLO Funding Limited (“HCLOF”), brought an unfair prejudice application pursuant to sections 349 & 350 of the Companies (Guernsey) Law 2008 against HCLOF itself, founded on various allegations of mismanagement by the company’s directors in relation to their strategy to recover investment redemption proceeds held by U.S Bank National Association (“US Bank”).

The Application was comprehensively dismissed.

The Court held that in circumstances where CLOH had expressly disavowed any allegation of bad faith against the company or its directors, it could not then allege that the company had breached its duty to act in good faith towards its members, contained in a clause of the members’ agreement. That is because “there is no conceptual space where actions can be a breach of a duty to act in good faith but simultaneously not amount to bad faith. Actions are either one or the other, albeit the mental element – and there must be one – may not amount to actual dishonesty.”

The Court also confirmed established English authority that there is generally no room for equitable considerations to modify or constrain a party’s reliance on its powers and rights embodied in the express terms of the relevant contracts (e.g. Articles of Association and any Shareholders’ Agreement) where the context is a commercial relationship, and the contractual documents are carefully drawn, after negotiation, with legal advice, and made between commercially sophisticated parties. Equitable principles might be invoked in such circumstances only in “a very extreme and very rare case”, an example of which was not given.

The Court held that in light of those findings, the application must fail because CLOH’s case was put on the basis that the various complaints amounted to a breach of either (i) HCLOF’s contractual duty to act in good faith towards its members or (ii) equitable constraints on HCLOF’s conduct.

However, the Lieutenant Bailiff went on in any event to find that none of the conduct complained of could be deemed unfairly prejudicial within the meaning of s.349 of the Companies Law. Furthermore, she held that none of the relief CLOH sought  – orders that the company make a pro rata, in specie distribution of its assets to CLOH, or buy out CLOH’s shares at a certain price – was available as a matter of law, because neither option was supported by the majority shareholder, which had not been joined to the application.

Alan Gourgey KC and Sri Carmichael, together with Carey Olsen (Mark Dunster, Sarah Kett and Elliot Aron), acted for the successful respondent, Highland CLO Funding Limited. Anna Littler was instructed at an earlier stage in proceedings.

Read the full judgment