Rolls Building, Fetter Lane,
London, EC4A 1NL
B e f o r e :
| INDERJIT SINGH BHULLAR
|- and -
|JATINDERJIT SINGH BHULLAR
BHULLAR DEVELOPMENTS LIMITED
BHULLAR BROS. LIMITED
Mr Paul Chaisty QC and Mr Andrew Grantham (instructed by Mills & Reeve LLP) for the First Defendant
Hearing date: 11 June 2015
Crown Copyright ©
Mr Justice Morgan:
(1) Sohan was a director of BBL, BDL and BL until his death on 5 September 2008;
(2) Rajinder has been a director of BBL from 24 July 2007 until the present, a director of BDL from 3 August 2000 until the present and a director of BL at all material times until the present;
(3) Jat has been a director of BBL, BDL and BL at all material times; and
(4) Inder was a director of BBL, BDL and BL until he was removed from office on 28 April 2011.
The allegations of wrongdoing
(1) on 24 September 2007, BBL made a payment of £440,000 to Torex;
(2) between 24 September 2007 and 27 September 2007, BDL made 16 payments to Torex, totalling £196,000;
(3) on 21 August 2008, BDL made a payment of £335,446.37 to Torex.
(1) he acted in breach of duty in relation to the payments to Torex;
(2) in relation to Southgate B he acted in breach of duty by failing formally to declare his interest in the transaction; and
(3) there was no sufficient contemporaneous or subsequent ratification of the transactions.
(1) does the court have jurisdiction in relation to a double derivative claim following the enactment of sections 260 to 264 of the Companies Act 2006?
(2) has Inder established a prima facie that BBL and BDL are entitled to the relief claimed against Jat?
(3) for the purposes of issue (2) above, has Inder established a prima facie case that Jat cannot successfully rely on a limitation defence in relation to the payments to Torex?
(4) has Inder established a prima facie case that the case falls within the exception to the rule in Foss v Harbottle (1843) 2 Hare 461? In relation to this issue, a number of sub-issues were raised, as follows:a) is this a case of actual fraud?b) did Jat benefit from the alleged wrongdoing?c) is there "wrongdoer control" of BBL and BDL?d) could a reasonable board of directors of the relevant company consider it appropriate to bring these claims?
(5) should the court direct that Inder is to be indemnified out of the assets of the relevant company and/or BL for his costs in bringing these claims, such costs to include any adverse orders for costs made against him?
Is there a prima facie case that BBL and BDL are entitled to the relief claimed against Jat?
"A prima facie case is a higher test than a seriously arguable case and I take it to mean a case that, in the absence of an answer by the defendant, would entitle the claimant to judgment. In considering, whether the claimant has shown a prima facie case, the court will have regard to the totality of the evidence placed before it on the application."
"The matter has been further complicated by the frequent use of the phrase "a prima facie case." That phrase is not self-explanatory: what is it that the case shows prima facie or at first sight? Is it that on the evidence as it stands at the moment the accused would seem to be guilty, or is it that the evidence contains allegations set out in such a way that further investigation is justified? I would hope that a less ambiguous phrase will be used especially in any future legislation."
Is there a prima facie case that the claim falls within the exception to the rule in Foss v Harbottle?
"They include: the size of the claim; the strength of the claim; the cost of the proceedings; the company's ability to fund the proceedings; the ability of the potential defendants to satisfy a judgment; the impact on the company if it lost the claim and had to pay not only its own costs but the defendant's as well; any disruption to the company's activities while the claim is pursued; whether the prosecution of the claim would damage the company in other ways (e.g. by losing the services of a valuable employee or alienating a key supplier or customer) and so on. The weighing of all these considerations is essentially a commercial decision, which the court is ill-equipped to take, except in a clear case."
(1) the breakdown in the relationship between Inder and Jat is long standing;
(2) the origins of the breakdown pre-dated the events which Inder now says amount to wrongdoing by Jat;
(3) Inder has known about the September 2007 payments to Torex since early 2008;
(4) it is less clear when Inder became aware of possible wrongdoing in relation to the August 2008 payment to Torex; the full picture in relation to that matter only appeared in the course of the present proceedings;
(5) Inder has known of the transfer of Southgate B to Jat since early 2009;
(6) there has been correspondence between solicitors for Inder and Jat since 2008;
(7) for some considerable time, Inder has not been involved in running the affairs of BBL or BDL;
(8) Jat has made allegations of wrongdoing against Inder in relation to Silvercrest Trading Ltd;
(9) for a considerable time, Jat has been suggesting a formal split between himself and Jat in relation to the companies; Jat has offered to buy Inder out;
(10) Rajinder has supported Jat's suggestions of a formal split between Inder and Jat;
(11) the claims and cross-claims between Inder and Jat are much wider than the allegations of wrongdoing made in the derivative claim.
An indemnity as to costs?
"I would suggest that the case illustrates the need for a profound rethinking of the processes available under our law for the investigation and determination of questions concerned with the control and use of companies' funds by directors and others in a position to influence their use."
"Upon the effective hearing of the summons the court would determine whether the plaintiff should be authorised to proceed with the action and, if so, to what stage he should be authorised to do so without further directions from the court. The plaintiff, acting under the authority of such a direction, would be secure in the knowledge that, when the costs of the action should come to be dealt with, this would be upon the basis, as between himself and the company, that he has acted reasonably and ought prima facie to be treated by the trial judge as entitled to an order that the company should pay his costs, which should, I think, normally be taxed on a basis not less favourable than the common fund basis, and should indemnify him against any costs he may be ordered to pay to the defendants."
"It is, of course, not for me to question the correctness of the decision of the Court of Appeal in Wallersteiner v Moir (No. 2), but I may observe that the justice of an order which may throw upon a company which, in the event, is proved to have no cause of action whatsoever against the other defendants, who may prove to be completely blameless, the entire costs of an action which it did not wish to be prosecuted, is extremely difficult to comprehend. The real injustice of the situation lies in the encouragement which the Court of Appeal gave to the application for such an order being made at the commencement of the action, at a time when, of necessity, the plaintiffs believe that they have a good case, and will with hand on heart swear that they have, and before the completion of discovery and inspection, which may well show that their beliefs, though honestly enough held, are not in fact well founded. It is to be observed that in Wallersteiner v Moir (No. 2) the application was made at a late stage in the proceedings, after Mr. Moir (who was the plaintiff by counterclaim) had already substantially succeeded, but who had no powder and shot left to finish the battle. The manifest justice of such an order in favour of a person in such a position is plain enough."
"If a finding is to be made, at the stage when leave is granted, as to the shareholder's entitlement to be indemnified in respect of liabilities and expenses which may be incurred in the future, the terms in which the finding is made should reflect the fact that there is a limit to the extent to which the court can assess, in advance, the reasonableness of his having incurred any particular liability or expense, and therefore the appropriateness of an indemnity. The dangers of the court's writing a blank cheque for the shareholder as to the amount of expenses which he can incur in the derivative proceedings are obvious. That has a number of implications. First, the court must be satisfied that it is necessary for such an order to be made prospectively, rather than the shareholder's entitlement to indemnification being considered after the expenses have been incurred. We do not however doubt that there may in appropriate cases be compelling reasons for finding the member entitled to be indemnified at the stage when leave is granted: in particular, as Buckley L.J. explained in Wallersteiner v Moir (No.2) at 399, minority shareholders may require the assurance of a prospective order so that they are not deterred from bringing derivative proceedings, where such proceedings ought to be brought, by the risk of incurring not only their own expenses but also a liability for the expenses of the defenders. Secondly, in cases where a prospective finding is appropriate, it makes sense for such findings to be made on a staged basis: that is to say, a finding can be made in respect of liabilities and expenses incurred up to a specified stage in the derivative proceedings, reserving leave to the shareholder to apply in the leave proceedings for a further finding once that stage has been reached. The appropriate stages will depend upon the circumstances, including the nature of the procedure which is anticipated in the derivative proceedings. … Although it may be desirable that the member should be able to embark on the derivative proceedings in the confident expectation that he will be indemnified against outlays and liabilities which have been reasonably incurred, the court cannot definitively prejudge the question whether all his future outlays and liabilities have been so incurred. A reasonable offer in settlement, for example, might be made at any time, rendering the further prosecution of the derivative proceedings unreasonable. Even if leave were granted on a staged basis, the possibility of a material change of circumstances occurring during the intervening period could not be excluded. For these reasons, it appears to us that a prospective finding that the shareholder is entitled to be indemnified should not be unconditional, but should reserve leave to the company to apply for the finding to be modified in the event of a material change of circumstances."