The Legal Framework for Family Business Disputes

The legal framework for family business disputes is broader than many family business owners realise. Specifically, family business disputes can involve company law, partnership law, trust law, contract law, employment law, succession law and family law all at once. As a result, the legal questions are rarely confined to a single area. Often, the same set of facts can give rise to claims under several different headings. Importantly, understanding the legal framework is not about being able to draft your own pleadings. Rather, it is about knowing what the law can and cannot do, so that you can take the right advice at the right time. Crucially, the right legal framework also depends on whether the family business is incorporated, a partnership, or run through a trust.

This page sets out the main parts of the legal framework that apply to family business disputes in England and Wales. Specifically, it covers the company law framework, the partnership law framework, the trust and estate framework, and the broader principles that cut across all of them.

The company law framework

Importantly, most family businesses today are run through limited companies. Specifically, the relevant law is the Companies Act 2006, supplemented by case law going back more than a century. As a result, the company law framework is the most commonly invoked legal framework in family business disputes.

Unfair prejudice petitions under section 994

The single most important provision is section 994 of the Companies Act 2006. Specifically, this gives a member of a company the right to petition the court for relief on the basis that the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of its members. Crucially, section 994 is the workhorse of family business litigation. As a result, almost every reported family business dispute case in the last forty years has been brought under section 994 or its predecessors. For a fuller treatment, see unfair prejudice petitions in family business disputes and unfair prejudice claims and shareholder disputes.

The remedy under section 996

By contrast, section 996 sets out the remedies the court can grant on a successful unfair prejudice petition. Specifically, the court has wide discretion. The most common remedy is a court-ordered buyout of the petitioner’s shares by the respondents at a fair price. However, the court can also regulate the company’s affairs going forward, order the company to do or refrain from doing things, and authorise civil proceedings to be brought in the company’s name. Importantly, the court’s discretion is one of the broadest in English company law. For the leading authority on the breadth of the discretion, the Court of Appeal in Re Bird Precision Bellows Ltd [1986] Ch 658 confirmed that the court can do whatever it considers fair and equitable to put right and cure the unfair prejudice.

Derivative actions under sections 260 to 264

Importantly, where the complaint is about wrong done to the company itself rather than to the petitioner individually, the appropriate procedure is often a derivative action under sections 260 to 264 of the Companies Act 2006. Specifically, this allows a shareholder to bring a claim on the company’s behalf against directors who have breached their duties. Crucially, derivative actions require the court’s permission and are subject to a series of statutory hurdles. As a result, they are less common than unfair prejudice petitions but are sometimes the right vehicle. For more on this, see unfair prejudice claims and derivative actions.

Directors’ duties under sections 171 to 177

By contrast, sections 171 to 177 of the Companies Act 2006 set out the duties owed by directors to the company. Specifically, these include the duty to act within powers, the duty to promote the success of the company, the duty to exercise independent judgement, the duty of reasonable care, skill and diligence, the duty to avoid conflicts of interest, the duty not to accept benefits from third parties, and the duty to declare an interest in proposed transactions. Importantly, breaches of these duties can give rise to claims by the company, or by shareholders through derivative actions. Crucially, family business disputes often involve allegations that directors have breached these duties by preferring family interests over the company’s interests.

Just and equitable winding-up under section 122

Finally, where the relationship between the shareholders has broken down so completely that the company cannot continue, the petitioner may seek a just and equitable winding-up under section 122(1)(g) of the Insolvency Act 1986. Specifically, this allows the court to wind up a solvent company on the ground that it is just and equitable to do so. Importantly, the leading authority is Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, in which the House of Lords held that the petitioner could be wound up on the just and equitable ground where the basis of association between the parties had irretrievably broken down. As a result, this remedy is particularly important in quasi-partnership cases.

The quasi-partnership doctrine

Crucially, family businesses are very often quasi-partnerships in legal terms. Specifically, a quasi-partnership is a company that has the legal form of a limited company but the underlying character of a partnership. The doctrine was developed by the courts to deal with the situation where shareholders had treated each other as partners in everything but legal form. Importantly, where a company is found to be a quasi-partnership, additional principles apply.

For example, the shareholders are taken to have legitimate expectations of one another beyond the strict legal rights set out in the articles of association. Likewise, where the relationship of trust and confidence between quasi-partners breaks down, that itself can be grounds for an unfair prejudice petition or a just and equitable winding-up. Crucially, the doctrine has particular consequences for share valuation. Specifically, in a quasi-partnership, the court usually values the shares without applying a minority discount. As a result, the minority shareholder receives the proportional value of the company rather than a discounted figure. For a fuller treatment, see quasi-partnership in family companies.

The partnership law framework

Importantly, where the family business is structured as a partnership rather than as a limited company, the relevant law is the Partnership Act 1890. Specifically, this remains the foundational legislation on partnership in England and Wales, more than 130 years after it was enacted. As a result, family partnerships and family limited liability partnerships are still governed by a framework that pre-dates limited companies as the dominant business form.

Crucially, the Partnership Act sets out the relationship between partners, the duties owed between them, the rights of each partner to participate in management, the rules for sharing profits and losses, and the circumstances in which the partnership may be dissolved. Specifically, the law of partnership is much more flexible than company law about the internal arrangements between partners. By contrast, it is much more inflexible about the consequences of disagreement. For example, in the absence of a partnership agreement, any partner can usually dissolve the partnership on notice. As a result, partnership disputes often end in dissolution where company disputes would have ended in a buyout. For more on this, see resolving business partnership disputes.

The trust and estate framework

Importantly, family business disputes often involve trusts and estates. Specifically, family businesses are commonly held through trusts for tax planning, succession or asset protection reasons. As a result, the trustees of a family trust may be among the parties to a dispute, and the duties owed by trustees become part of the legal framework.

Likewise, family business disputes frequently arise on the death of a founder. Specifically, the will may distribute shares between family members. The estate may need to be administered. Beneficiaries may challenge the will. As a result, the legal framework includes the Inheritance (Provision for Family and Dependants) Act 1975, the law of probate, and the equitable doctrines of proprietary estoppel and constructive trust. Crucially, these can be particularly important where a family member claims to have been promised an interest in the business but no formal documentation supports the promise. For more on this, see family business disputes after a death.

Contract law and the shareholders’ agreement

By contrast, contract law sits alongside company law as one of the most important elements of the legal framework. Specifically, the shareholders of a family business may have entered into a shareholders’ agreement that regulates how decisions are taken, how shares can be transferred, and what happens in particular events. Importantly, the shareholders’ agreement is a contract between the parties, enforceable on ordinary contractual principles. As a result, contractual remedies such as damages, injunctions and specific performance are available where the agreement is breached.

Crucially, a well-drafted shareholders’ agreement can prevent many of the disputes that would otherwise arise. Specifically, it can include dispute resolution clauses, exit mechanisms, pre-emption rights, and provisions about the appointment of directors. Importantly, families that have a shareholders’ agreement are far less exposed to the unfair prejudice route than families that do not. For more on this, see shareholders’ agreements for family businesses.

Family law and divorce

Importantly, divorce and family breakdown frequently intersect with family business disputes. Specifically, where a married family member divorces, the family business shares may be part of the matrimonial assets. Likewise, the divorcing spouse may seek to claim a share of the family business directly. As a result, the Matrimonial Causes Act 1973 and the practice of the Family Court become part of the legal framework.

Crucially, the interaction between family law and company law can be expensive and disruptive. Notably, the judge in Re Solent Garage Services Ltd [2020] EWHC 1975 (Ch) observed that an unfair prejudice petition between a separating couple about a small garage business should have been resolved within the divorce rather than fought as a company petition. As a result, family business disputes that overlap with divorce often need coordinated advice from a barrister familiar with both. For wider context, see the common causes of family business disputes.

Employment law and the family member as employee

Similarly, employment law often forms part of the legal framework. Specifically, family members who work in the business are usually employees with employment rights, just like any other employees. As a result, where a family member is dismissed or constructively dismissed, they may have claims for unfair dismissal, discrimination or breach of contract. Importantly, the existence of employment claims alongside shareholder claims is one of the things that makes family business disputes particularly complex. By contrast, the appropriate forum for each type of claim is different. Employment claims go to the Employment Tribunal. Shareholder claims go to the Business and Property Courts.

Proprietary estoppel and informal promises

Importantly, a particular feature of family business disputes is the role of informal promises. Specifically, family members are often told over many years that they will be given a stake in the business, or that they will take over the business, or that they will inherit shares. Crucially, these promises are rarely documented. As a result, when the promise is not honoured, the family member’s only legal route is often proprietary estoppel.

Specifically, proprietary estoppel is an equitable doctrine that can give effect to informal promises where the person who relied on the promise has acted to their detriment in reliance on it. Importantly, the doctrine has been developed in a series of cases including Thorner v Major [2009] UKHL 18, Gillett v Holt [2001] Ch 210 and most recently Guest v Guest [2022] UKSC 27. As a result, where the next generation has worked in the family business for years on the strength of a promise that has not been honoured, proprietary estoppel can be a powerful remedy. Crucially, the remedy is discretionary and the court has wide latitude in deciding what it should be.

The CPR, ADR and pre-action conduct

Importantly, the procedural framework matters as well as the substantive law. Specifically, family business disputes are subject to the Civil Procedure Rules. As a result, the parties are required to engage in alternative dispute resolution where appropriate, and may face costs sanctions for unreasonable refusal to mediate. Crucially, the Court of Appeal in Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416 confirmed that the court has the power to stay proceedings and order the parties to engage in non-court dispute resolution where it would be just and proportionate to do so.

As a result, mediation is no longer optional in any meaningful sense. By contrast, parties who refuse to engage in mediation when invited risk significant costs penalties. For more on the cost implications, see the cost of family business litigation. For the mediation route itself, see why mediation is usually the right starting point.

How the frameworks interact in practice

Crucially, in practice the legal framework for any particular family business dispute is rarely confined to a single one of the headings above. Specifically, the same dispute may involve unfair prejudice (company law), breach of fiduciary duty (company law and equity), breach of contract (shareholders’ agreement), employment claims (employment law), and a proprietary estoppel claim (equity). As a result, the legal strategy involves choosing which of these claims to pursue, in what order, and in what forum.

Importantly, the choice is not just legal. It is also practical. Specifically, the cost of pursuing a claim, the timetable, the disclosure obligations and the public nature of any court proceedings are all relevant. Crucially, this is one of the reasons why early specialist advice is so valuable. Specifically, the advice needs to address not just whether a claim exists but whether pursuing it is the right strategy. For wider context on the strategic question, see what makes family business disputes different.

The role of the barrister in family business disputes

Importantly, family business disputes often benefit from specialist barrister advice from an early stage. Specifically, the breadth of the legal framework means that few solicitors carry the full range of expertise in their head. As a result, instructing a barrister who specialises in family business and shareholder disputes can produce a sharper strategic picture much earlier in the process than would otherwise be available.

Crucially, barristers can be instructed directly by family business owners under the public access rules. Specifically, this means that you do not need to instruct a solicitor first. As a result, the cost of early specialist advice is often far lower than people assume. For more on this, see direct access barrister: legal advice, advocacy and representation.

Frequently asked questions

What law governs family business disputes in England and Wales?

In short, family business disputes are governed by a combination of company law, partnership law, trust and estate law, contract law, employment law and family law. Specifically, the most commonly invoked provision is section 994 of the Companies Act 2006, which deals with unfair prejudice. However, the full legal framework depends on the structure of the family business and the nature of the dispute. As a result, family business disputes are unusually complex from a legal point of view.

What is the most common legal claim in a family business dispute?

Typically, the most common legal claim is unfair prejudice under section 994 of the Companies Act 2006. Specifically, this is the petition brought by a minority shareholder who alleges that the affairs of the company are being conducted in a manner unfairly prejudicial to their interests. Importantly, the most common remedy is a court-ordered buyout of the petitioner’s shares at a fair price. For more on this, see unfair prejudice petitions.

Can a family member who was promised a share of the business but never given one make a claim?

Possibly, yes. Specifically, the equitable doctrine of proprietary estoppel may give effect to informal promises where the person relied on the promise to their detriment. Importantly, the doctrine has been developed in cases such as Thorner v Major, Gillett v Holt and Guest v Guest. As a result, family members who have worked in the family business for years on the strength of a promise that was not honoured may have a remedy. Crucially, the outcome depends heavily on the specific facts.

Is mediation legally required in family business disputes?

Effectively, yes. Specifically, the Court of Appeal in Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416 confirmed that the court has the power to stay proceedings and order the parties to engage in non-court dispute resolution. As a result, parties who refuse to engage in mediation risk significant costs penalties. Importantly, family business disputes are exactly the kind of cases where the court will expect serious engagement with mediation. For more on this, see why mediation is usually the right starting point.

Do I need a solicitor to bring a family business dispute claim?

Not necessarily. Specifically, barristers can be instructed directly under the public access rules. As a result, the family business owner can take advice from a specialist barrister without instructing a solicitor first. Importantly, this can produce a sharper strategic picture much earlier in the process than would otherwise be available, often at lower cost. For more on this, see direct access barrister: legal advice, advocacy and representation.

Further reading on this site

• Family Business Disputes (main page)
• Unfair Prejudice Petitions
• Quasi-Partnership in Family Companies
• Shareholders’ Agreements
• Family Business Valuation
• Why Mediation Is Usually the Right Starting Point
• The Cost of Family Business Litigation
• Family Business Disputes After a Death
• The Most Important Family Business Cases
• Unfair Prejudice Claims and Derivative Actions
• Business Partnership Disputes
• Direct Access Barrister

Get advice on your situation

The legal framework for family business disputes is broad and complex. Specifically, the right strategy depends on which of several legal claims is best suited to the facts of your case. As a result, early specialist advice is one of the most valuable investments you can make. Specifically, I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. In addition, my book Winning in Family Business Disputes (forthcoming) covers the legal framework in detail, alongside my published works on shareholder disputes and commercial mediation. Organisations like Family Business United also publish useful guidance for family business owners.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.