Mending the Mischief: Court of Appeal rules on remediability of repudiatory breaches in shareholders’ agreements
The recent Court of Appeal decision in Kulkarni v Gwent Holdings Limited [2025] EWCA Civ 1206 has provided helpful guidance on the interpretation of contractual clauses allowing for termination, or the compulsory transfer of shares, for ‘material or persistent’ and/or repudiatory breaches, and whether such repudiatory breaches are necessarily incapable of being remedied. While the decision turned, for the most part, on the specific wording of the relevant clauses, any additional clarity is welcome in an area of law which is often difficult for commercial actors – and legal practitioners advising them – to get right.
Factual background
The dispute arose out of the relationship between Mr Kulkarni and Gwent Holdings Limited, both shareholders in a private hospital company and parties to a shareholders’ agreement relating to the company (the “SHA”). The SHA recorded both Mr Kulkarni and Gwent as owning large shareholdings in the company; however, in reality, only one share was in fact owned by Mr Kulkarni due to the peculiarities of the regulations applicable to the private healthcare market.
The parties’ relationship broke down during the Covid-19 pandemic, resulting in Gwent procuring the company to (1) issue to Gwent the shares ascribed to Mr Kulkarni under the SHA as well as further newly issued shares, (2) purport to terminate the SHA, and (3) refuse to accept the appointment of a director that Mr Kulkarni was entitled to nominate under the SHA. However, Gwent backtracked shortly afterwards, causing the company to buy back the newly issued shares and accept the director's appointment.
First instance decision
Despite the reversal, Mr Kulkarni commenced proceedings against Gwent, claiming that it had breached the SHA by virtue of actions (1), (2) and (3) set out above. As a consequence, Mr Kulkarni claimed that Gwent should be treated as having served an irrevocable ‘Deemed Transfer Notice’ under the SHA, triggering compulsory transfer of Gwent’s shareholding in the company to Mr Kulkarni on terms unfavourable to Gwent. The specific trigger was contained in clause 7.1(d) of the SHA:
“A Shareholder is deemed to have served a Transfer Notice … immediately before any of the following events: …(d) the Shareholder committing a material or persistent breach of this agreement which, if capable of remedy, has not been so remedied within 10 Business Days of notice to remedy the breach being served by the Board (acting with Shareholder Consent).”
Importantly, the company’s board had not actually served any ‘notice to remedy’ on Gwent at any point.
Each of the actions set out at (1), (2) and (3) above was ultimately either admitted by Gwent or found by the judge to be in ‘material’ and ‘persistent’ breach of the SHA, with (1) and (2) admitted as being repudiatory. However, this did not assist Mr Kulkarni, because each of Gwent’s breaches was capable of remedy and had in fact been remedied by Gwent’s ‘backtracking’ – so that no ‘Deemed Transfer Notice’ had been triggered.
Issues before the Court of Appeal
The key issues of relevance before the Court were the following:
- Was a repudiatory breach of the SHA necessarily incapable of being remedied for the purposes of clause 7.1(d)?
- Was the judge wrong in finding Gwent’s specific breaches as being capable of remedy?
- As a matter of construction of clause 7.1(d) of the SHA, if a shareholder committed a ‘material or persistent’ breach of the SHA, was the question of whether the breach was also capable of being remedied within 10 business days contingent upon the company’s board first serving the notice to remedy?
Notably, at no point did Mr Kulkarni assert a common law right to terminate the SHA for repudiatory breach – and the issues before the Court were distinct from those arising in that context. The question of whether the breaches were remediable was instead one of contractual construction. (By way of contrast, a common law repudiatory breach, once it has happened, cannot be cured by the contract-breaker as a matter of principle – see e.g., Bournemouth University Higher Education Corporation v Buckland [2010] EWCA Civ 121).
Decision and reasoning
The Court of Appeal dismissed Mr Kulkarni’s appeal on all issues.
Regarding issue (a), the Court rejected Mr Kulkarni’s argument that a repudiatory breach of the SHA could not be remediable. In interpreting a right to remedy a breach in the context of a contractual right to terminate or trigger a compulsory transfer, the cases normally favoured “a practical rather than an unduly technical test”, with the question of “whether and how the mischief caused by the breach can be redressed” being chiefly relevant. “Remedy” therefore meant “cure so that matters are put right for the future”, rather than the need to “obviate or nullify the effect of a breach so that any damage already done is in some way made good”.
As to issue (b), the Court found that the judge “was not only entitled, but right” to find that the actual breaches in dispute in the first instance case were remediable. The wrongful allotments of shares could be – and were, in fact – reversed, thus removing the ‘mischief’ originally caused by them. The wrongful termination, as already noted, was effectively ignored by the parties. As for the initial refusal, and thus delay, of the appointment of Mr Kulkarni’s nominee as director, the Court endorsed the judge's view that, while exclusion of parties from management can have irremediable consequences, this was not actually the case on the facts. The Court also considered the motivation behind the breaches to be irrelevant and refused to revisit the High Court’s assessment of the seriousness of each of the breaches.
None of the above was to say that every breach of contract is capable of remedy, with the Court giving examples of potentially non-remediable breaches, such as sub-letting and illegal / immoral use of premises under a tenancy agreement, publication of confidential information, and broadcasting and deployment of new marketing materials and livery in breach of existing marketing arrangements. In each of those cases, the apparent common thread is the existence of enduring prejudice resulting from the breach.
With regard to issue (c), in rejecting Mr Kulkarni’s appeal, the Court considered the construction of the specific wording of the SHA. In interpreting the clause, the Court endorsed the principle in Re Coroin Ltd [2013] EWCA Civ 781, [2014] BCC 14, that clauses which provide for the possibility of shareholders losing the right to their shares are expropriatory in nature and should therefore be interpreted narrowly. The Court endorsed the view that shareholders’ rights are “not to be cut down by uncertain language or doubtful implications”; or, put even more sharply, that “…rights of property should not be taken away by a side wind and without warrant…”. It was also noted that, where a breach is cured, an innocent shareholder has alternative remedies available such as a claim for damages or other relief from unfairly prejudicial conduct – so they are not left without a remedy.
Finally, the Court also found against Mr Kulkarni on the two remaining issues, rejecting his claim that the statements in the recitals of the SHA with regard to the size of his shareholding gave rise to an estoppel, so that he should be deemed to hold shares that he had not subscribed for, and also his claim that the pre-SHA relationship between the parties had to be taken into account when construing the SHA and/or remediability.
Comment
This case has provided welcome clarity concerning remediability of ‘material or persistent’ or repudiatory breaches, and a helpful restatement of the judicial approach to the interpretation of expropriatory clauses more generally. This is particularly useful given that commercial parties are routinely advised to incorporate extensive and detailed mandatory transfer / termination clauses into their contracts, to hedge against the uncertainty of having to rely on common law rights if something goes awry. In this context, the Court’s indications as to its practical approach to remediability and the limited scope for the common law on repudiatory breaches of contract to override the contractual provisions used are both particularly helpful.
Considerable mischief in this case stemmed from the failure by the interested party / the company correctly to follow the contractual notice provision which was intended to trigger the 10 business days remedy period. It is likely that, but for that failure, the parties could have saved considerable costs in the dispute, even if it would likely not have had significant impact on the overall outcome in this particular set of facts. Innocent parties that wish to force the exit of badly behaved shareholders would be well advised to follow the relevant contractual provisions for doing so to the letter.
