England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
A DERIVATIVE CLAIM
IN THE MATTER OF SEVEN HOLDINGS
IN THE MATTER OF THE COMPANIES ACT 2006

		30 June 2011

Introduction and background

1. Some four to five years ago Mr Richard Percy ("Mr Percy") and Mr Gareth Trevor ("Mr Trevor") embarked on a joint venture to redevelop and sell up-market residential properties in Kent. The vehicle which they formed for this purpose was the Second Defendant company ("the company"). Each had an equal stake in the company held through a wholly owned company, the claimant in the case of Mr Percy and Maddisonjay Estates Limited in the case of Mr Trevor. For linguistic convenience, I shall elide the interposition of these two companies and hereafter treat and refer to the two men as if each was a 50% shareholder in the company, and as if Mr Percy were the claimant in this action. They were both also directors, and indeed the sole directors, of the company, which - as is common ground - was in effect a quasi-partnership.
2. The company was funded in part by advances from the Bank of Ireland, secured against the redevelopment properties, and from loans from the two directors. In fact, it has engaged in redevelopments at only two sites, both in Bromley: (a) at 10 Austin Avenue, where two houses were built and a third renovated and extended; and (b) at 30 Sundridge Avenue. There is no prospect of the two men agreeing to engage through the company on any further operation. 30 Sundridge Avenue has been sold, as has 10A Austin Avenue. Sales subject to contract have been agreed for 10B and 10C Austin Avenue for a total of over £1.3m, but exchange of contracts is being held up by what appear to be minor conveyancing complications, likely at worst to result in some small reduction in price. By comparison the current debt to the bank, secured on those two properties, stands at around only £550k^[1]. Unsecured creditors have been reduced to some £55k, ignoring the loan accounts of the two directors. The amounts due to the two men under those accounts are the subject of a number of disputes which will feature later in this judgment.
3. For a variety of reasons the relationship between Mr Trevor and Mr Percy began to break down in the course of 2009 and has degenerated to a point where all trust and confidence between the two men has disappeared with important consequences given the deadlock structure of the company. It has also infected the communications between their respective accountants and lawyers One important consequence has been that both the company and the two men have been prosecuted and fined as the result of their inability to agree and file the statutory company accounts for the year ended February 2009, and remain vulnerable to further prosecution. In the meantime the deadline for filing the accounts for the following year has also passed, raising the prospect of prosecution for that year as well. The correspondence between the parties and their representatives and the content of the present litigation give no ground for hope that this position will change; quite the contrary.
4. The present action, commenced on 1 November 2010, augmented in draft Amended Particulars of Claim ("APC"), makes a large number of allegations against Mr Trevor, which Mr Percy seeks - by the claimant - to advance as derivative claims on behalf of the company. For this purpose he requires, and applies for, the permission of the court under section 260 ff of the Companies Act, 2006 to continue the action (and also seeks an order under CPR 19.9E that the company should indemnify him against any liability for costs). Section 261 provides that an application for such permission shall only be allowed to proceed if it appears to the court that the application and the evidence filed in support of it disclose a prima facie case for granting the permission, at which point only the court may give directions for service of the application and claim form on the company^[2].
5. In the present case, things did not proceed as the statute contemplated. Matters began to go awry when Mr Percy sought a worldwide freezing order against Mr Trevor. Vos J, on 12 November 2010, refused to grant such an order without notice to the defendants and indicated that the application should be heard inter partes by the judge hearing the application for permission to continue the derivative action. In the event, at a hearing of both applications before Henderson J on 17 November 2010, the parties agreed in a consent order on a limited freezing order, an attempt to resolve their disputes by mediation, and an adjournment of the two applications to a date to be fixed in the event, as turned out to be the case, that the mediation failed. It was on this basis that the applications came before me on 26 May 2011^[3]. In the meantime, Mr Trevor had served evidence in reply to that filed in support of the continuance application, Mr Percy had responded and both sides had provided detailed skeleton arguments.
6. The scheme specified by the statute has thus been entirely undermined in the present case. The preliminary filter of a prima facie case for permission has been bypassed; and the defendant to the proposed claim has been made de facto a respondent to the application without any order to that effect by the court^[4]. I cannot avoid taking account of the evidence and submissions advanced by Mr Trevor, and neither counsel submitted that I should. The argument essentially proceeded on the basis that I was dealing with "stage 2" of the process, albeit without any prior decision or presumption that the application and its supporting evidence disclosed a prima facie case in favour of the grant of permission.
7. As I observe at the end of this judgment, the distortion of the statutory procedure was unfortunate, or worse, in its consequences.

The required approach to the grant of permission

8. As a threshold requirement, under section 260(3) a derivative claim may only be brought in respect of "a cause of action arising from an... act or omission involving negligence, default, breach of duty or breach of trust by a director of the company". This would require the alleged act or omission by Mr Trevor to be in his capacity as a director, a point of relevance to at least one of the claims.
9. A further threshold requirement is imposed by Section 263(2) as follows:

"Permission ... must be refused if the court is satisfied-

(a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim ..."

Section 172(1) provides that

"A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to-

(a) the likely consequences of any decision in the long term,

(b) the interests of the company's employees,

(c) the need to foster the company's business relationships with suppliers, customers and others,

(d) the impact of the company's operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company."

As previous judges have pointed out, and I agree, since there are many cases where a director acting in accordance with section 172 could properly decide either to continue the claim or not to do so, section 263(2) must be interpreted as requiring the court to be satisfied that no director complying with section 172 would seek to continue the claim: Airey v Cordell [2007] BCC 785, 800, Franbar Holdings Ltd v Patel [2009] 1 BCLC 1,11, Iesini v Westrip Holdings Ltd, [2009] EWHC 2526 (Ch) at para. 86.

10. Section 263(3) then provides (so far as relevant in the present case) that

"In considering whether to give permission ... the court must take into account, in particular-

(a) ... ^[5];

(b) the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to continuing it;

(c) ...

(d) ...

(e) ...^[6]

(f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company."

11. A number of observations on section 263(3) are pertinent at this stage.
12. As regards sub-paragraph (b) of Section 263(3), none of the matters referred to in section 172(1) other than perhaps item (f) appear to me likely in the present case to be of any or any significant relevance to a hypothetical decision by a director as to whether the continuance of any of the claims by the company would be appropriate or to his evaluation of the importance of continuing them. There are however other factors which might properly come into play, including the size 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, and 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 (see Franbar at paragraph 36 repeated in Iesini at paragraph 85).
13. Sub-paragraph (f) of section 263(3) refers to the availability of a cause of action which the member can pursue in his own right. Counsel for Mr Trevor submitted that an unfair prejudice petition under section 994 would fall within this sub-paragraph. Such a petition does not in my view fall easily within the expression "cause of action". That appears to me academic, however, since the matters enumerated in section 263(3) are expressed to be non-exclusive, as indeed are those in section 172. I have no doubt that the existence of an alternative remedy is well capable of being a relevant factor, whether or not it fits the description of "a cause of action", and such a remedy could properly include a petition under section 994, though subject to the comments of Millett J in Re Charnley Davies Ltd (No 2) [1990] BCLC 760 at 784.
14. More pertinently, however, in the present case I consider that a potential winding-up of the company, though not a cause of action or perhaps even a remedy, can be a significant factor both as regards the importance that a hypothetical director would attach to the prosecution of a claim and the overall decision of the court whether to grant permission for the claim to be brought by the applicant as a derivative claim.
15. In the present case, the company is not only deadlocked but has run its course, subject only to sale of the two completed units at Austin Avenue. I can see no prospect of the parties agreeing statutory accounts, putting the company once more into breach of the criminal law and exposing it and the two men to further prosecution and fines. It is in short a natural candidate to be wound up on a just-and-equitable petition by either shareholder (see e.g. Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426; Re Worldhams Park Golf Course Ltd, Whidbourne v Troth [1998] 1 BCLC 554 at 556). Indeed, it appears that at least Mr Trevor has refrained from taking such a course solely because the appointment of a liquidator might precipitate a reduction in the price achievable for 10B and 10C Austin Avenue.
16. Mr Percy suggests that the court would make no order on a just-and-equitable petition by Mr Trevor on the basis that the latter is without clean hands having regard to the matters alleged against him. This submission faces at least three difficulties. Firstly, it begs the question as to which, if any, of the allegations of misconduct are well-founded. Secondly, a defence of "unclean hands" would presuppose that the collapse in mutual confidence was due to the alleged misconduct of Mr Trevor (see Vujnovich v Vujnovich [1990] BCLC 227), whereas that collapse appears on the material before me to arguably predate the raising of complaints by Mr Percy of misconduct. Thirdly, the argument focusses solely on the collapse in confidence without taking also into account that (a) the company has run its course and (b) its management is deadlocked to the point of not being able to comply with its statutory obligation to file accounts.
17. In any event, as will appear from what I say later in this judgment, Mr Trevor is on any realistic view of matters a very substantial net creditor of the company and therefore able in this capacity to petition for the winding up of the company. It seems to me highly improbable, if not inconceivable, that Mr Percy either could or would wish to fund the company to discharge its debt to Mr Trevor (who would then remain as a 50% shareholder).
18. Moreover, nothing would preclude Mr Percy from himself presenting a petition to wind up the company on either the just-and-equitable ground or as a creditor of the company on his own loan account.
19. It accordingly seems to me right to proceed on the basis that the company will almost certainly go into a winding-up by one route or another. The precise timing of this may be affected by the further progress (or otherwise) of the sale of 10B and 10C Austin Avenue. On the basis of the (admittedly limited) information in the evidence before me, I consider it likely that in the near future the conveyancing complications will probably be resolved, perhaps with a small discount on the price, or in default of that Mr Trevor will petition to wind up the company.
20. It is therefore in my view appropriate to consider the comparative merits of leaving all or some of the disputes to be dealt with by a liquidator rather than by litigation in a derivative action, and factor these into the overall decision which the court has to reach under section 263 as regards each of the claims.
21. Finally, as is clear from CPR 19.9E, the grant of permission does not carry with it an automatic right for the applicant to be indemnified by the company in relation to its costs, whether as to the costs incurred in prosecuting the claims or any liability to the defendant for the costs of an unsuccessful claim. A different order may be appropriate depending on the circumstances of the case, including the apparent strength or weakness of the claim, especially where (a) the dispute is between the two directors and shareholders, and (b) there are no significant unsecured outside creditors (cf Kiani v Cooper [2010] EWHC 577 Ch at paras 47 to 49).

Further background to the claims

22. (a) Austin Avenue was bought in about January 2007. In addition to finance from the Bank of Ireland, each man contributed around £244k to the purchase costs, the amount being credited to his director's loan account. Further advances, including advances for the purchase of materials, increased the credit balance to around £300k in the case of Mr Trevor and £275k in the case of Mr Percy.

(b) After exchange of contracts on Sundridge Avenue, Mr Trevor made a large number of further advances to the company. Some amounts were repaid and debited to his loan account when 10A Austin Avenue and later Sundridge Avenue were sold. By the end of January 2009 the credit balance of his loan account was over £800k. By contrast, Mr Percy made no further advances, but received repayments of around £40k, and had a credit balance of around £220k^[7].

(c) It also appears that from November 2008 Mr Trevor made a large number of payments on behalf of the company to suppliers and unsecured creditors out of his private bank account at Coutts, because - according to Mr Trevor - Mr Percy had instructed the bank not to honour any cheques on the company's account signed by Mr Trevor. He says that this was done to ensure the completion of Sundridge Avenue and avoid a winding-up petition, though this is put in issue by Mr Percy^[8]. The sums in question^[9] exceed £300k.

23. (a) While Austin Avenue and Sundridge Avenue were being developed, both Mr Percy and Mr Trevor were engaged in building a family house for personal occupation, Mr Percy at 25 Bosbury Road, Catford, and Mr Trevor at 7 Mavelstone Close, Bromley. The latter site, a few minutes walk from Sundridge Avenue and part of a larger plot which Mr Trevor agreed to buy together with Mr Julian Beale in May 2007 on the basis that it would be physically divided between them, was transferred into his name in November 2007.

(b) It is common ground that building materials were often ordered on the company's account, though intended for use at Bosbury Road or Mavelstone Close. Mr Trevor says that this was agreed by the two men on the basis that such materials would be debited to their loan accounts; Mr Percy disputes this. Whichever version of events is correct, it is not in dispute that Mr Trevor could not recover on his loan account without giving credit for the value of material delivered to Mavelstone Close. There is however a dispute as to amount, complicated by the fact that the invoices do not always record the precise delivery address.

The claims

24. I turn to the individual claims advanced in the Amended Particulars of Claim, using the numbering in paragraph 50 of that pleading^[10], though not wholly in that order. Given the number of claims, and the need - stressed in earlier cases - to avoid a mini-trial, I shall try to deal with them concisely. I have however read and had regard to all the arguments on both sides, even if not addressed expressly.
25. I deal with the claims in two groups.

Group A

Claims (i) and (ii)

26. The APC avers that in October 2007 Mr Trevor told Mr Percy that he was considering buying a plot of land from Mr Beale at Mavelstone Close. Complaint is made that he failed to tell Mr Percy that he had already agreed to do so in May 2007. I unable to see how, even if correct, that could give rise to a claim by the company, let alone satisfying Section 260(3).
27. It is further averred that about the same time Mr Trevor told Mr Percy that a business partner of Mr Beale, Paul Deakin, had placed 30 Sundridge Avenue on the market with an asking price of £900k, and suggested that it would be a good development opportunity for the company. Mr Percy was opposed to the idea but was eventually persuaded by Mr Trevor that the company should buy the property for £840k, contracts being exchanged at that price on 28 February 2008. The pleading alleges that the property was not worth £840k. Against this, Mr Trevor points out that only six weeks after exchange the bank obtained an independent valuation in the sum of £865k, £25k more than the company had paid. Nonetheless, the Particulars of Loss state that "it is estimated that the Company overpaid for the Sundridge site to the extent of approximately £340,000" (which suggests that the property was worth only £500k), adding that further particulars would "be provided after expert valuation evidence has been obtained". This makes clear that no such evidence had been obtained when the pleading was drafted, and none was placed before me.
28. It is said nonetheless that Mr Trevor knew or should have known that £840k was "considerably more" than the vendor had been offered before, despite the property having been marketed for a considerable time. The only basis suggested for this allegation is "his personal dealings with the vendor and his close association with Beale". Moreover, the fact that the vendor had turned down lower offers is in no way inconsistent with £840k being a fair price, especially in the light of the independent and higher bank valuation.
29. It is then pleaded that "until full disclosure herein the Claimant cannot state with any degree of certainty that the First Defendant was in breach of his duty not to accept a benefit from a third party ... conferred by reason of his actions in persuading the Company to purchase Sundridge Close". The pleading goes on to "aver" that it is for Mr Trevor "to demonstrate that he did not receive a benefit whether by way of a reduced price payable for his interest in Mavelstone Close or otherwise". The propriety of such a pleading appears to me seriously questionable, and it does not appear to disclose a cause of action. It also ignores and is hard to reconcile with the fact that the purchase of Mavelstone Close was agreed and completed months before contracts were exchanged on Sundridge Avenue.
30. In the light of these vices and weaknesses, I am of the firm opinion that no director seeking to comply with his section 172 duty would consider that it was appropriate for the company to prosecute either of these claims.

Claim (iv)

31. Mr Trevor paid £660k for 7 Mavelstone Close. After building a substantial dwelling-house, in which he lives, he has recently been seeking offers of some £2 million. The APC contend that the company is entitled to recover the whole of the difference, £1.34m. The suggested basis for this claim is the supplies to Mavelstone Close invoiced to the company to which I refer when dealing below with claim (iii)^[11]. Counsel for Mr Percy was however unable to explain to me how these could give rise to an obligation to account to the company for the whole of his gross profit^[12] on Mavelstone Close ^[13]. The claim would also duplicate in part claim (iii).
32. In these circumstances, I do not consider that any director would seek to prosecute this claim.

Claim (vi)

33. In August 2006 the two men agreed in principle with the vendor of Austin Avenue to buy the site for £1m. The development was to be funded in part, as I described earlier, by loans from each of the two men. The pleading avers that though Mr Percy arranged funding in time to make the loan, Mr Trevor failed to do so; that this caused a delay in exchanging contracts; that the vendor then increased the price by £25k. It is contended that in consequence the company has a claim against Mr Trevor for £25k. Mr Trevor agrees that there was a delay (with an attendant price increase), but says that it was due to a conveyancing complication.
34. The suggested claim faces the serious factual difficulty that the vendor wrote requiring an increase (in fact of £50k) on 3 January 2007, some six days before the company was incorporated (on 9 January 2007)^[14]. Even ignoring that temporal obstacle, it is hard to see how the company could have had a claim against Mr Trevor.
35. Moreover, even on Mr Percy's account of matters, there would not have been a claim "arising from an... act or omission involving negligence, default, breach of duty or breach of trust by a director of the company" or even a liability incurred by Mr Trevor in his capacity as a director. It therefore would not have the potentiality to be a derivative claim as defined by section 260(3).
36. I therefore refuse permission by reason of section 260(3) and would otherwise have done so under section 263(2)(a).

Claims (xii) and (xiii)

37. This is in essence a claim that Mr Trevor caused the completion of the development at Austin Avenue to be delayed resulting in further interest charges and potentially lower sale prices.
38. In so far as this is based on paragraph 38 APC I have dealt with its weaknesses in discussing claim (i) above
39. In so far as it relies on paragraphs 40 and 41 APC it falls with claim (xi), which has been withdrawn.
40. Paragraphs 39 and 42 APC are both unparticularised and unsupported by anything other than speculative assertion.
41. The claim also ignores the fact that the company would have benefited from a more rapid termination and sale of Sundridge.
42. In my assessment no director acting in accordance with section 172 would seek to prosecute this claim, and I must therefore refuse permission.

Claim (xv)

43. This is a claim for £1,667, the amount of the fine incurred by the company as result of the failure to file statutory accounts. On the materials before me it seems to me highly unlikely that the lack of agreement on the accounts can be laid, or laid uniquely, at the door of Mr Trevor. If the hypothetical director considered that this matter should be pursued by the company, I doubt if Mr Percy could be excluded. In practice, I do not think any director would do so, given the nature of the matter and the small amount involved in comparison with the costs of resolving the argument.

Claim (xvi)

44. This is a claim for £1,545.32, the amount of a demand for VAT penalties and interest. HMRC has recently cancelled it. No director would cause the company to sue for it.

Supplementary comment on Group A claims

45. I have formed the view in each of these cases that they do not pass the threshold below which I am obliged to refuse permission^[15]. Had I taken a contrary view, I would in each case have considered that a director, acting in accordance with section 172 would attach only small importance to the prosecution of the claim by the company, in particular having regard to the defects which I pointed out above and in some cases to the small amount of the particular claim as compared with the costs of the litigation which would be involved. Had I nonetheless been minded as regards a particular claim to grant permission to Mr Percy (or more accurately the claimant) it would only have been on terms that he should himself fund the litigation without resort to the company and without any indemnity from the company as to his costs.

Group B

Claim (iii)

46. Though presented as a single claim, this is more accurately a very large number of individual claims, totalling £461,465.85, for alleged misappropriation of materials and labour, mainly the former, relating to the matters I outlined in paragraph 22 above. The core of the dispute revolves around so-called unallocated amounts, on which the parties and their accountants are at complete loggerheads, with Mr Percy's side taking the position - on the face of it an extreme one - that all such amounts are to be attributed to Mavelstone Close, and therefore to be debited to Mr Trevor's loan account. The situation cries out for an independent examination which in my view will almost certainly be more efficiently achieved in or through the medium of a liquidation than in a court action.

Claim (v)

47. Mavelstone Close was included on the company's Contractors All Risks policy. Mr Trevor has accepted that he must reimburse the company for the appropriate share of the premium, which he estimates at approximately £1,000, and that this can be done by deduction from his loan account. There is no need for any positive claim by the company. It can also be dealt with by the liquidator in settling its accounts.

Claims (vii) and (viii)

48. These are minor claims in respect of the purchase of trucks used by each of the two men. Mr Trevor accepts that he is obliged to account for the proceeds of sale of "his" truck, but says that he used them in part to pay off company creditors. These claims will in my view be best dealt with in the liquidation accounting process, and not by a derivative action.

Claim (ix)

49. This relates to £10k paid to Mr Trevor by the company's solicitors on 4 March 2008. His explanation is that in February 2008, before funding was received from the bank he paid £10k on behalf of the company to the vendor of Sundridge Avenue as a deposit to enable the company to enter on the site before exchange and in part-payment of the purchase price. When the bank funding became available the solicitors refunded the money to Mr Trevor. Had they not done so, he would have been entitled to a credit in his loan account.
50. The accuracy of this can be most efficiently ascertained by a liquidator.

Claim (x)

51. Mr Duncan McDougall acted as a foreman for the company. It is not in dispute that he was employed at a rate of £1,000 per week with the agreement of both men.
52. The pleading avers that he was paid £21k twice for the same services. Whether this is the case, is a matter which the liquidator should be able to readily determine.
53. The pleading further states that, Mr McDougall also acted as foreman at Mavelstone Close. It goes on to recite that between March 2007 and March 2009 the company made payments totalling about £82k to Mr McDougall (which would be less than he would have been entitled to at £1000k per week). It then states until full disclosure has been given "the Claimant is unable to establish the amount paid by the Company in respect of Duncan McDougall's services used for the purposes of the First Defendant", which seeks to use a begged question to make an unsubstantiated allegation. That defect is not improved by the further pleading that Mr Trevor "is put to strict proof that the labour was engaged for the purposes of the Company and/or that the payments were made for the purposes of the Company".
54. I am in no doubt that this matter would also be best dealt with in a liquidation and not by derivative action.

Claim (xi)

55. This was withdrawn.

Claim (xiv)

56. This relates to a number of different payments. Without going in detail, I am once again in no doubt that a liquidation would be the best forum for these to be investigated.
57. I also note that a large number of the payments, in excess of £300k, referred to in paragraph 44 APC and listed in Schedule B were made by Mr Trevor out of his own bank account. These cannot therefore give rise to a claim by the company, the only question is whether they were made for the purposes of the company^[16] and are to be added to Mr Trevor's loan account. No director would therefore cause the company to bring a positive action in respect of these payments^[17].

General comment on Group B claims

58. On any realistic view, these claims, even in aggregate, would be comfortably exceeded by the amount due to Mr Trevor on his loan account. There is therefore no need for any positive action by the company. It could simply await suit by Mr Trevor for the balance of his account and set off the claims by way of partial defence, though in practice it is virtually inconceivable that Mr Trevor would seek to recover the balance of his loan account other than in a liquidation, where any cross-claim or set-off would in any event be taken into account. In these circumstances, I consider that no director would consider it desirable for the company to prosecute a claim for any of these amounts^[18]. Indeed, I can see no possible benefit to the company in adopting such a course.
59. On that basis, I am obliged to refuse permission for Mr Percy to continue any of these claims on behalf of the company.
60. Had I reached a different conclusion, I would have decided that in any event these disputes would be better resolved in the context of a winding-up, and that this consideration is not outweighed by any other factor. While I appreciate that it may be thought in the interests of both men to postpone this until at least the exchange of contracts on the two final units at Austin Avenue, and perhaps completion of those transactions, my assessment is that this is unlikely to result in substantial further delay. In any event, (a) either side has it within its power to seek a winding-up at any time and (b) since the credit balance is firmly in favour of Mr Trevor, it is he - rather than the company - which will be disadvantaged by any delay.

Closing observations

61. My experience in this case, together with the reported cases to which I was referred, suggests that applications of this sort are set fair to become another time-consuming and expensive staple in the industry of satellite litigation. In the present case, the court was presented with three lever-arch files of pleadings, statements and documents in addition to detailed skeleton arguments and extensive lists of authorities. The argument before me was contained within a day, but only as the result of extensive (and underestimated) pre-reading by the court and the submission and consideration of supplementary skeletons on an important point after the hearing.
62. The inclusion in the Companies Act of an ex parte stage provides a hurdle and filter which in my view should not be dispensed with. As with any ex parte application the matter should be presented and explained transparently and fairly so that the court can make a properly informed decision whether it is right to put the company (and the potential defendant) to the expense and inconvenience of considering and contesting the application. This can only be achieved if the applicant sets out clearly and coherently the nature and basis of each claim together with the supporting evidence and and legal basis. It must also draw the attention of the court squarely to any legal and evidential difficulties and to any fact at odds with its contentions. The same open, clear and frank approach must be adopted by the applicant as regards the factors which the court is required or may reasonably be expected to take into account in deciding whether it must, or ought to, refuse permission. All this is particularly important since the legislation contemplates that its preliminary examination will be done by the court solely on the papers^[19].
63. As will appear from earlier observations in this judgment, those standards were not met in the present case. If they had been, the task of the court would have been greatly simplified, even though the case did not in the event pass through the filter stage. Moreover, if that stage had been observed, it seems to me likely that at least a large number of the claims, and perhaps all of them, would have been eliminated then. Either way the cost and time expended by the parties and court on this matter would have been significantly reduced. There is here, as it appears to me, a moral of some general application.

Note 1   The interest on this debt is defrayed by rental income.    [Back]

Note 2   CPR 19.9A (12) also requires the court to order that “any other appropriate party” should also be made a respondent to the application, though this appears to go beyond what is contemplated in section 261.    [Back]

Note 3   ® This judgment addresses only the application to continue the action. I have postponed argument on the application for the freezing order, and will deal with it separately in due course, if it is not resolved by agreement.    [Back]

Note 4   4 Ironically, the company has not been made a respondent, or appeared before me, though given the deadlock in management it could not have been able to advance any separate position    [Back]

Note 5   This sub-paragraph refers to “whether the member is acting in good faith in seekingto continue the claim”. Apart perhaps from a faint half-sentence in his skeleton, which was not pursued orally, I was not asked by Counsel for Mr Trevor to find the contrary.    [Back]

Note 6   It was common ground that sub-paragraphs (c) to (e) were irrelevant.    [Back]

Note 7   The figures in these two sub-paragraphs appear from the two loan account schedules attached as Appendix 7 to the draft statutory accounts as proposed by Mr Percy.    [Back]

Note 8   At paragraph 44 APC.    [Back]

Note 9   Included in Schedule B APC.    [Back]

Note 10    Save for claim (xi) which was withdrawn.    [Back]

Note 11   See paragraphs 46 ff below.    [Back]

Note 12   As yet unrealised.    [Back]

Note 13   Mr Percy did not seek to advance a rather different claim that Mr Trevor would have benefited by the delay in reimbursing the company. In any event, any such claim would have been of relatively modest size and also dependent on the amount of supplies. It would in addition have faced the difficulty that Mr Trevor would have been entitled to withdraw a corresponding sum from his loan account with the company.    [Back]

Note 14   These dates are as stated in Mr Percy’s own pleading and witness statement.    [Back]

Note 15   Indeed, all these claims - save perhaps claim (xv) - appear to me susceptible to being struck out or dismissed on a summary judgment application.    [Back]

Note 16   Mr Trevor says (see paragraph 22(c) above) that the payments were made to suppliers and unsecured creditors to ensure the completion of Sundridge Avenue and avoid a winding-up petition.    [Back]

Note 17   These sums therefore should be regarded as if they were in Group A above.    [Back]

Note 18   In the case of the sums referred to in paragraph 57 above, this is compounded by the additional reason which I indicate there.    [Back]

Note 19   Subject to an ex parte oral hearing if the application is rejected on the papers: CPR 19.9A(10).     [Back]