England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		11 June 2008

PRELIMINARY

1. In this action the First Claimant, Fanmailuk.com Limited ("Fanmail"), seeks a declaration that the entire share capital of the Fifth Defendant, Dialtime Plus Limited ("Dialtime"), is held on trust for itself by the nominal shareholders of Dialtime. The Second Claimant, Mr Burtenshaw, brings a derivative claim for the benefit of Dialtime. He claims that the directors of Dialtime diverted a profitable or potentially profitable business opportunity away from Dialtime into the Fourth Defendant company ("MCashback"), which was their own corporate creature. On that basis he seeks for the benefit of Dialtime an account of profits made by the directors from their alleged breach of fiduciary duty or equitable compensation for such breach.
2. The above is the barest statement of the broad nature of the claims made in this action. The facts, at least in their detail, are far from straightforward and highly contentious with a number of twists and turns. A large body of evidence has been put before me on the present application. I understand how the parties, when faced with factual allegations with which they disagree, want to set the record straight as they see it. Nevertheless, I take the view that on an application of the present sort it would have been quite wrong for me to embark on anything like a mini-trial of the action. I have read all the evidence which I was asked to read, but I do not propose to lengthen this judgment unduly by a detailed factual analysis of every point where there is disagreement. In my view, it would be wrong, and it is unnecessary, to do so.
3. It is particularly unnecessary given the course which the hearing took. By the end of the argument I had come to the conclusion that the right course on the present, rather unusual, facts was as a matter of case management (a) to direct a trial of the claim brought by Fanmail as a preliminary issue prior to any trial of what is currently a derivative claim brought by Mr Burtenshaw and (b) to adjourn the application before me for consideration, if necessary, after the trial of that preliminary issue. I announced my conclusion at the end of the hearing. I also, at the invitation of Mr Kosmin QC representing the First to Fourth Defendants, expressed my view that a particular way of putting the case would not come within the scope of the Claimants' Particulars of Claim, as they currently stand after re-amendment. I should nevertheless say, in fairness to Mr Tomlinson QC who appeared for the Claimants, that I do not believe that he was in fact putting the case in that way. Having ruled that there should be a trial of Fanmail's claim as a preliminary issue, I gave directions with a view to such trial taking place on the first open date after 1 October 2008. In the time available it was not feasible for me to deliver a full reasoned judgment but I was invited by the parties to express my overall conclusion orally and deliver my reasons in writing in due course.
4. This judgment sets out the reasons why I took the course I did. However, my decision was essentially a case management decision such that a lengthy written judgment would be undesirable. Moreover, I must bear in mind that I have adjourned, not decided, the application before me. For reasons which I shall explain, it may become unnecessary for the application ever to be adjudicated upon. In case, however, it does in the event become necessary, it would be wrong for me now to express concluded views about the merits of the application except to the extent necessary to explain why I decided to adjourn it. In the circumstances, I propose to confine this judgment within narrow bounds.

THE APPLICATION

5. The application before me was an adjourned application under CPR 19.9. That Rule requires a minority shareholder, such as Mr Burtenshaw as regards Dialtime, to obtain the permission of the Court in order to maintain a derivative action for the benefit of the company in which the cause of action is vested. The application has to be considered by reference not only to CPR 19.9 but also by reference to sections of the Companies Act 2006 which came into force, subject to transitional provisions, in October 2007.
6. In fact, in the present case permission (unopposed) was granted by Lightman J on 3 May 2007. However, since then the Claimants have served Re-amended Particulars of Claim. On one view, at any rate, this document introduced substantial alterations to the way the case is put following, it is said, disclosure of documents by the First to Fourth Defendants. Accordingly, the latter took the view that permission to continue with the action was required. The Claimants for their part do not accept that further permission was necessarily required. Nevertheless, they accept that the Court retains a continuing supervisory role over derivative actions: cf. the observations of Lightman J in Fraser v Oystertec [2004] EWHC 2225 (Ch) at [29]. They are content to seek permission to continue the claim as now formulated in the Re-amended Particulars of Claim.
7. On 19 March 2008 the Claimants made various applications which came on for hearing before Floyd J. These included the application for permission to re-amend the Amended Particulars of Claim and the present application for permission to maintain the derivative claim. By consent, permission to re-amend was granted, and the application for permission to continue the derivative claim was adjourned with such permission being granted over the adjournment.

THE BACKGROUND

8. Fanmail was originally set up by Mr Burtenshaw and the Third Defendant, Mr Zghari, with a number of different investors including the First Defendant, Robert Cooper, and his son David. An idea for the development of a system whereby bonus airtime for mobile phones could be earned at supermarket checkouts was conceived and a new company, Dialtime, was formed to develop and market the idea. Three shares in Dialtime were registered in the names of Mr Burtenshaw, Mr Robert Cooper and Mr Zghari; the fourth share remained in the name of the Sixth Defendant, but she is a company formation agent who claims no beneficial interest in the share.
9. Apparently, there was considerable discussion and negotiation about the intended beneficial ownership of the Dialtime shares, but it is said that agreement was never reached. It is accordingly the case for Fanmail that all the shares in Dialtime are held on trust for Fanmail as the party which procured the incorporation of the company. That is the claim which Fanmail makes in the present proceedings.
10. Relations between Mr Burtenshaw and the others involved with Dialtime, that is Mr Robert and Mr David Cooper and Mr Zghari, deteriorated. It seems that the others formed a plan to transfer the benefit of the project for granting mobile phone airtime at supermarket checkouts to a new company of their own creation. On 30 July 2002 MCashback was incorporated. Then, by an assignment of 6 September 2002 the entirety of what was described as "the Dialtime IP" was transferred by Dialtime to MCashback. Effectively, this was the totality of Dialtime's rights and interest in the project. The assignment was approved at a Board meeting which Mr Burtenshaw did not attend.
11. Following the assignment to MCashback Dialtime was effectively moribund. All subsequent development and marketing of the project was carried out through MCashback, a company in which Mr Burtenshaw had no involvement. The evidence referred to various of what are claimed to be developments from the original Dialtime system and marketed, or attempted to be marketed, under the names M Rewards, M Top Up and M In A Box. Essentially, all these were concerned with the grant to supermarket customers of rewards or credits for purchases made at checkouts or a means of delivering such rewards or credits.
12. Of some significance in the history is a substantial investment made by Standard Chartered Bank in MCashback in February 2007. The bank subscribed £16.1 million for shares in MCashback and also purchased shares from existing shareholders. It seems that Mr Robert Cooper received £941,000 and Mr Zghari £471,000 for shares which they personally owned. Following this large cash investment by the bank MCashback has been developing a system called M Money Transfer, a system whereby members of the public may make transfers of money through the mechanism of supermarket checkout facilities.

THE CLAIMS

13. The Re-Amended Particulars of Claim advance two discrete claims, one by Fanmail and the other by Mr Burtenshaw. Whilst there is, of course, some connection in terms of the history of relevant events, in truth there is no overlap at all between the two claims. The claim of Fanmail is simply one to the effect that, no agreement having ever been reached as to the beneficial ownership of the shares in Dialtime, the consequence is that the shares are held in trust for its benefit by the nominal registered shareholders. Such claim is quite distinct from the claim of Mr Burtenshaw which is to the effect that the former directors of Dialtime were in breach of fiduciary duty towards Dialtime by procuring the assignment to MCashback of 6 September 2002.
14. Consistently with the above, the relief sought by Fanmail is a declaration that Mr Robert Cooper, Mr Burtenshaw and the Sixth Defendant hold the issued shares of Dialtime on trust for Fanmail and an order for transfer of the shares. The principal relief sought by Mr Burtenshaw (on behalf of himself and the other shareholders in Dialtime other than Mr Robert Cooper) is: (i) a declaration that MCashback holds certain interests on trust for Dialtime (ii) an account in favour of Dialtime of profits derived from what is defined in the Statement of Case as "the Corporate Opportunity" (iii) equitable compensation for breach of fiduciary duty and, in the alternative, (iv) payment of money which is said to be due from MCashback to Dialtime under the assignment. The "Corporate Opportunity" is widely defined in paragraph 1 of the Re-Amended Particulars of Claim. Notably, the definition includes what is called "the Developed System". As I read the pleaded definition of "the Developed System", it would not include M Money Transfer.
15. Because it appeared greatly to concern Mr Kosmin in the argument before me having regard to the fourth witness statement of Susan Harris, I should say that I do not read the Re-Amended Particulars of Claim as claiming an account of profits which MCashback has derived or will derive from the exploitation of M Money Transfer. M Money Transfer does not fit within the Developed System as defined. Some of the earlier documentation, created at a time when necessarily the Claimants would not have known about the details including the software of M Money Transfer, may suggest that such a claim might be advanced. But, as I said above, I do not think that Mr Tomlinson was in fact suggesting, at least not by the time of the hearing before me, that Dialtime would be entitled to an account of all the profits derived by MCashback from the exploitation of M Money Transfer.

THE LEGAL FRAMEWORK FOR THE APPLICATION

16. CPR 19.9(4) provides in the case of a derivative claim such as Mr Burtenshaw now makes:

After the issue of the claim form, the claimant must not take any further step in the proceedings without the permission of the court, other than --
…….

Under CPR 19.9E the Court may also order a company for whose benefit a derivative claim is brought to indemnify the claimant against any costs liability. In the present instance, however, Mr Burtenshaw is content for costs to be dealt with at the end of the case and not to seek any prior indemnity.

17. It was common ground before me that on this application for permission regard must be had to sections 260 - 263 of the Companies Act 2006. In the light of my decision expressed at the conclusion of the hearing it is unnecessary for me now to elaborate on those sections. However, I should note that it is a case to which the transitional provisions contained in Schedule 3 of the Companies Act 2006 (Commencement No 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007 S.I. No 2194 apply. This is because the acts complained of in this litigation occurred before 1 October 2007. Broadly, the effect of those transitional provisions is that the application for permission must fall within the requirements for permission as they were both prior to commencement of sections 260 - 263 as well as under those sections. Nevertheless, on the facts of this case it was not suggested that, if the case does fall within the law as it now is, there was some reason why it would not have fallen within the law as it was before commencement of the relevant sections.

THE CONTENTIONS OF THE PARTIES

18. On behalf of Mr Burtenshaw it was submitted by Mr Tomlinson that there was here a strong case for saying that there had been a breach of fiduciary duty by the directors of Dialtime other than Mr Burtenshaw. This consisted of the transfer out of Dialtime to their own corporate vehicle set up for the purpose, MCashback, of the project which had been the whole raison d'être for Dialtime. Mr Tomlinson took me at the hearing through a number of documents which, he submitted, demonstrated that the business opportunity siphoned off to MCashback was a valuable one and one which had led to substantial amounts of money being made. Obviously, given the ownership of the registered share capital of Dialtime, the claim for breach of fiduciary duty was not one which Dialtime itself was going to be able to bring. If the claim succeeded, Dialtime stood to recover substantial sums. Therefore, Mr Tomlinson submitted, the present was a paradigm case for the bringing of a derivative claim. It was a claim to the continuation of which considerable importance would be attached by any director acting in accordance with section 172 of the Companies Act 2006: cf. section 263 of that Act. At the very least one could not say that a reasonable board (of Dialtime) could not decide to continue the claim: cf. Airey v Cordell [2007] Bus LR 391 at [75] – [76] per Warren J.
19. For the First to Fourth Defendants, on the other hand, Mr Kosmin submitted that this was a derivative claim which a director acting in accordance with his duty under section 172 of the 2006 Act would not approve. He submitted that the approach of Warren J in Airey was no longer good law as it had been superseded by the 2006 Act which required the Court actually to decide what a director would in fact do rather than what he might reasonably do. In his argument before me Mr Kosmin did not address the question of breach of fiduciary duty. Rather, the main thrust of his argument was directed towards the submission that what had been transferred from Dialtime to MCashback had turned out to be demonstrably worthless. He referred me to a number of documents, including annual accounts of MCashback, which he submitted established beyond question that no profits at all had been derived from the rights which had been transferred out of Dialtime. This was going to be, Mr Kosmin submitted, a vastly expensive claim in terms of legal costs with no real prospect of any worthwhile recovery. Mr Kosmin also drew my attention to certain other features of the case; such features included changes in the formulation of the claim from time to time, breach of an undertaking given to the Court on the restoration of Fanmail to the Register, the fact that a partner in the Claimants' solicitors has invested money and become a shareholder in Fanmail and the fact that the claim was being funded under a conditional fee arrangement. Mr Kosmin suggested that these features tended to show that the claim had not been brought bona fide in the interests of Dialtime but was speculative and oppressive.

DISCUSSION

20. Mr Kosmin's primary submission was that I should straightaway refuse permission for the continuance of the derivative claim. Nevertheless, at the close of his oral submissions he put forward, as one alternative, that I might direct a trial of Fanmail's claim by way of preliminary issue in the action and adjourn the permission application until after the conclusion of that preliminary issue. This suggestion took Mr Tomlinson by surprise as it had not been made previously, whether in Mr Kosmin's skeleton argument or in correspondence. He urged me to reject the proposal and to grant permission. Upon further consideration I concluded that in the particular circumstances of the present case it would be right to accede to Mr Kosmin's alternative suggestion as a matter of case management. I came to this view for the following reasons.
21. In coming to my conclusion I bore in mind the requirements of CPR 1.4 which provide:

(1) The court must further the overriding objective by actively managing cases.
(2) Active case management includes --
……
(b) identifying the issues at an early stage;
……
(d) deciding the order in which issues are to be resolved;
……

22. The essential reasons why I concluded as I did relate to the unusual feature of the present action in the inclusion of the claim by Fanmail. The issues in the claim brought by Fanmail are wholly separate and distinct from the issues in the claim brought by Mr Burtenshaw. There is no factual overlap in the ingredients of the two claims. Fanmail's claim will involve examination of the parties' intentions as regards the shareholding in Dialtime, the course of the parties' negotiations about the ownership of the shares and what, if anything, was agreed. Doubtless, there will also be legal argument over the consequences in law of whatever the facts may be. The beneficial ownership of the shareholding in Dialtime is, however, of no relevance to the claim for breach of fiduciary duty against those who were at the relevant time directors of Dialtime.
23. Whilst there is no overlap in the issues as between the two claims, the outcome of Fanmail's claim will be of considerable significance as regards the procedural framework of the claim currently brought by Mr Burtenshaw. If Fanmail succeeds in its claim, it will then wholly control Dialtime. On that basis, there will be no need to pray in aid an exception to the rule in Foss v Harbottle. Fanmail will be able to procure that the directors of Dialtime can decide for themselves whether or not Dialtime should continue the claim now framed as a derivative claim. The court will have no need to second guess what directors of Dialtime, complying with their duties under section 172 of the Companies Act 2006, would (or, if Airey remains good law, reasonably could) do. Of course, if Fanmail's claim fails then Mr Burtenshaw's claim will have to proceed, if at all, as a derivative claim and the question of permission will have to be resolved. But, even then, it is possible that knowledge of the true position in relation to the beneficial ownership of the Dialtime shares may, and I stress may, have some materiality to the permission application.
24. It is true that the course I have directed will result in some delay in the resolution of the breach of fiduciary claim, although in the context of the passage of time which has already accrued the additional delay may, or need not, be that great. I acknowledge also that, although the issues in the two claims do not overlap, there is likely to be some increase in costs due to there being two substantive hearings rather than one single trial. It is right to say that, if I had thought that resolution of the permission application was a straightforward matter, I would not have ordered separate trials of the claims with an adjournment of the application until after conclusion of the first trial. If the major issues between the parties had been confined to issues on liability for breach of fiduciary duty I would probably have concluded that the right course would be to determine the application straightaway. But there are here serious issues as to the extent of any liability and as to whether an independent board of directors would think that a cost/benefit analysis came down in favour of pursuing the claim. I emphasise that I am very far from expressing any concluded view and must certainly not be read as tending to think that permission should be refused. It is simply that I do not regard that aspect of the case as entirely straightforward.

CONCLUSION

25. In the result I gave directions as set out in the Minute of Order agreed by Counsel. I will, of course, hear the parties on any other consequential matters arising out of this judgment.