In Royal Westminster Investments SA v Varma  EWHC 3439 (Ch), the court considered whether a shareholder suing a company director on their own behalf could obtain an injunction to restrain the director from using company funds to meet his legal costs. The applicants also sought a mandatory interim injunction requiring the director to repay those funds which had already been used.
The underlying claim concerned the share ownership in the company. The applicants alleged that there was an oral agreement between them and the sole director (and sole shareholder) that 57.5% of the shares in the company would be issued to them. No shares were ever issued to them and they alleged that the director and the company had breached the agreement. They were seeking specific performance of the agreements, rectification of the company’s register of members, and damages.
The director denied that he was acting wrongfully and resisted the orders.
The application for both orders failed. In reaching the decision, the court considered a number of principles:
- it is a principle of company law that a company’s money should not be used in disputes between its shareholders – this includes unfair prejudice and derivative claims;
- there was precedent for interim injunctions to be made to restrain the use of company money for legal costs, even in cases where it was uncertain whether such expenditure would be inappropriate;
- despite this, there was no authority to support the proposition that a shareholder, suing on his own behalf, could seek repayment by a director of money used in this type of situation. Any such order would have to be made on the basis that the director had breaches his duties to the company and could only be sought by the company.
Issues of the sort in dispute in this case can easily be avoided by having in place a written agreement – normally called a “shareholders’ agreement’ – which clearly sets out the relationship between parties involved in a company, their entitlement to shares and their rights as shareholders.