England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		18 October 2012

Mr Justice Roth :

Introduction

1. This is an application for permission to bring derivative proceedings in the name of Avro Heritage Ltd ("the Company") under Part 11 of the Companies Act 2006^[1]. Mr Joseph (Jo) Bamford and Mr J H (Harry) Harvey are the sole directors of, and each is a 50% shareholder in, the Company. Mr Bamford is the claimant and Mr Harvey is the only substantive defendant, although in the usual way the Company has been joined as second defendant.
2. Statutory derivative claims are governed by the provisions in ss. 260-264 (and ss. 265-269 in Scotland). Those provisions establish a two-stage procedure for obtaining permission to bring such a claim. The first stage, as set out in s. 261(2), is essentially an ex parte procedure, although by CPR r. 19.9A(4) copies of the application notice, with the claim form and evidence relied on for the permission application, must be sent to the Company. By order of 19 June 2012, Vos J allowed the claim to proceed to the second stage. Accordingly, he found that the application and evidence in support disclosed a prima facie case: see s. 261(2)(a). This is the second stage of the permission application, determined after Mr Harvey has served his evidence and a hearing at which both sides were represented.

The statutory provisions

3. Section 263 sets out the approach to be applied in determining the grant or refusal of permission. Sub-sections 263(2)-(4) provide:

"(2) 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, or

(b) where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company, or

(c) where the cause of action arises from an act or omission that has already occurred, that the act or omission-

(i) was authorised by the company before it occurred, or

(ii) has been ratified by the company since it occurred.

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

(a) whether the member is acting in good faith in seeking to continue the claim;

(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) where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be-

(i) authorised by the company before it occurs, or

(ii) ratified by the company after it occurs;

(d) where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company;

(e) whether the company has decided not to pursue the claim;

(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...

(4) In considering whether to give permission the court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter."

4. Section 268 sets out equivalent provisions as regards the granting of leave to raise derivative proceedings in Scotland.
5. Accordingly, there are three grounds specified in the statute on any of which permission must be refused: s. 263(2). If they do not apply then, in considering whether to give permission, there are set out six factors which the court "must take into account": s. 263(3). In addition, the court must have "particular regard" to the additional matter set out in s. 263(4). However, the s. 263(4) consideration has no application in the present case since there are no members of the Company who have no personal interest in the matter.

The nature of the dispute

6. Unusually, in this case the strenuous objection to this action proceeding by way of derivative claim is not based on any of the grounds in s. 263(2) or (3). Instead, for Mr Harvey it was submitted that the bringing of a derivative claim against him is inappropriate as a matter of principle since there is a mechanism whereby Mr Bamford could procure that the Company brings ordinary proceedings against him. While Mr Harvey contends that he would have a good defence to such proceedings (although the basis of that defence was not explained), on his behalf it was argued by Mr Casement QC that permission to bring the particular form of proceedings by way of derivative claim should be refused and that the claim can be reconstituted as an ordinary action in the name of the Company. However, it was submitted that Mr Bamford should pay all the costs incurred to date by reason of his mistaken commencement of a derivative action.
7. Although Mr Casement submits that an important principle is here involved as to when derivative proceedings can be employed, in reality I consider that the dispute in that regard between the parties has been driven by tactical manoeuvring seeking to impose a cost burden by the one upon the other.

The facts

8. The underlying facts giving rise to the claim against Mr Harvey are relatively simple. The Company was incorporated on 6 September 2010 for the express purpose of purchasing a site at Woodford Aerodrome in Cheshire ("the Woodford Site") from BAE Systems for the purpose of redevelopment. In December 2011, the Company entered into a contract to purchase the Woodford Site from BAE for a total price of £40.35 million plus VAT ("the Woodford transaction").
9. Under the contract, the price was payable in stages: a deposit and the first stage payment, amounting together to £20 million (plus VAT), were duly paid by the Company in December 2011. Thereafter, £3.5 million (being the VAT on the relevant part of the second stage payment) was payable by 27 January 2012; and the second stage payment itself of £20.35 million is payable by 15 November 2012, although there is provision for possible postponement to 31 December 2012.
10. Mr Bamford is a party to the Woodford transaction as personal guarantor of the Company's obligations to pay the £3.5 million and the second stage payment of £20.35 million.
11. On the same date as the Woodford transaction, the Company entered into an agreement with Redraw Homes Ltd ("Redraw") and Harrow and Estates plc ("the Redraw Agreement") to sell 80 acres of the Woodford Site to Redraw for the total price of £41 million (plus VAT). That price was also payable by instalments: £21 million (plus VAT) was due on completion; £4 million (being VAT on the second stage payment) was payable by 3 January 2012; and the second stage payment of £20 million by 31 December 2012. From the particulars of claim served by Mr Bamford, it appears that Redraw has duly paid the instalment due on completion and further, on about 2 January 2012, the sum of £4 million.
12. Mr Bamford alleges that in late January 2012, following a meeting which Mr Harvey had with representatives of BAE and discussions on the possibility of the Company becoming involved in a larger deal involving other BAE sites, Mr Harvey told him that BAE had agreed to defer the Company's obligation to pay the £3.5 million VAT to the end of February 2012. Then, on about 23 February 2012, following another meeting with BAE's representative, Mr Harvey told Mr Bamford that BAE had agreed to a further deferral of the obligation to pay the £3.5 million until 30 December 2012.
13. In telephone conversations over the next few days, Mr Harvey told Mr Bamford that he was in financial difficulties in completing the purchase of the property where his family lived and asked if the Company could lend him £3.5 million on a short term basis, which he would repay at least one month before the Company was obliged to pay that sum to BAE. Mr Bamford says that in reliance on Mr Harvey's representations about what BAE had agreed, he agreed to that loan and, because of the urgency, that the money could be advanced prior to the execution of loan documents. There is no dispute, as I understand it, that the sum of £3.5 million was then transferred to Mr Harvey on about 28 February 2012. Further, by e-mail on 21 March, the Company's solicitor sent draft loan documents covering the loan to Mr Bamford and Mr Harvey.
14. Subsequently, on about 4 April 2012, Mr Bamford became aware that BAE had not in fact agreed to the deferral of the £3.5 million payment to 30 December 2012 but remained entitled to call on the Company to make that payment at any time. Further, in two separate e-mails sent on 4 April 2012, Mr Harvey stated that he would repay the £3.5 million loan by 31 May. However, he still had not signed the loan documents and Mr Bamford had by this stage become very concerned. He set out his concerns in a long e-mail of 3 May, noting that there was accordingly a very substantial unsecured loan to Mr Harvey with no document to support it. Since the £3.5 million could be demanded by BAE at any time, in the absence of repayment by Mr Harvey of the loan the Company would be unable to meet that demand and would therefore be insolvent. He accordingly requested Mr Harvey to repay the loan by 11 May.
15. Mr Harvey did not reply to that e-mail, and Mr Bamford's solicitors accordingly sent Mr Harvey a letter of claim on 14 May. That letter states as follows:

''Since at Board level the Company is deadlocked, and you would be able to (and undoubtedly would in fact) block any board resolution Mr Bamford might propose authorising the company to issue proceedings against you to compel you to repay the Loan, Mr Bamford intends to issue a derivative claim against you under Part 11 of the 2006 Act seeking an order that you repay the Loan to the Company unless you repay the sum of £3.5 million to the Company in cleared funds by 4.00 pm on 1 June 2012.

Please note that if Mr Bamford is compelled to take this step, he will, when applying for permission under section 261 of the 2006 Act to continue the derivative claim, also seek a costs indemnity order whereby the company will indemnify him against any liability in respect of costs he may incur either in the permission application or in the derivative claim generally."

16. Mr Harvey did not respond to that letter, nor did he make any repayment by 1 June. He also failed to respond to an e-mail from Mr Bamford sent on 12 June, asking whether he would be repaying the £3.5 million loan that week to enable the Company to pay BAE on 15 June.
17. Meanwhile, BAE agreed to an extension of time for payment provided that £2 million would be paid by 15 June and the balance of £1.5 million by 27 July. Since without the repayment from Mr Harvey the Company could pay only £500,000, Mr Bamford paid the additional £1.5 million so that BAE could receive the £2 million it had required on 15 June. The further £1.5 million, I was told, that fell to be paid to BAE two days after the hearing of this application would similarly be funded by Mr Bamford since the Company did not have funds of that order.
18. It was in these circumstances that the derivative claim was issued on 13 June.

The proceedings

19. In his witness statement filed in support of the application, Mr Bamford stated:

"It is plain that Harry would not permit [the Company] itself to bring any proceedings to enforce its rights against him and would exercise his powers as a director to prevent it from doing so.

20. The opposition by Mr Harvey to these proceedings rests on the proposition that the Company could indeed bring proceedings against him and that he could not have prevented it from doing so. The argument is based on the Shareholders Agreement made between Mr Bamford, Mr Harvey and the Company on 25 November 2011, the same date as that on which the Company adopted its present Articles of Association.
21. Clause 11 of the Shareholders Agreement provides, in so far as material:

"11.1 Notwithstanding any other provision of this agreement, if a Shareholder (the "First Shareholder") or any person connected with the First Shareholder:

(a) is, or is alleged to be, in breach of any obligation owed to the Company (whether under this agreement, the Articles or otherwise);

then it is agreed that any decision in relation to the prosecution of any right of action of the Company in respect thereof shall be passed to and dealt with by the Directors other than any Director appointed by the First Shareholder. Such Directors shall have full authority on behalf of the Company to negotiate, litigate and settle any claim arising in relation to any such matter to the exclusion of the rights and powers ... of the First Shareholder (and any Director appointed by it). The First Shareholder shall take all steps within its power to give effect to the provisions of this clause 11.1.

11.2 A Director appointed by the First Shareholder shall be excluded from that part of any Board meeting at which a matter referred to in clause 11.1 is considered and such Director and the First Shareholder shall not receive, or have access to, the Board papers, minutes or documents relating to, or any action taken in connection with, that matter to the extent that any information of a confidential nature relating to a dispute with the First Shareholder (or any person connected with the First Shareholder) would otherwise be required to be disclosed to such Director or the First Shareholder"

The reference to Directors (in the plural) includes a single Director: see clause 1.4.

22. Accordingly, submitted Mr Casement, since this claim concerns the alleged breach of an obligation of Mr Harvey to repay his personal loan to the Company, it is abundantly clear hat Mr Bamford would have "full authority on behalf of the Company to... litigate" that claim to the exclusion of the rights of Mr Harvey.
23. Faced with this argument, Mr Lightman submitted that clause 11 was prima facie exclusionary, cutting back the rights which the First Shareholder or his nominee director would otherwise have. He pointed to clause 18.2 of the Shareholders Agreement, which provides that the agreement does not constitute an agreement to alter the Articles. I note that clause 18.2 also states that in the event of any conflict between the agreement and the Articles, then as between the shareholders the provisions of the agreement shall prevail. Mr Lightman submitted that the provisions of clause 11 do not alter the quorum requirements for a directors' meeting set out in the Articles. Since the Articles incorporate (by para 1.2) the Model Articles contained in Schedule 1 of the Companies (Model Articles) Regulations 2008, a quorum is required for a directors' meeting to be effective (except for a proposal to call another meeting). Under clause 11.1 of the Articles, the quorum for a directors' meeting is two directors. On that basis, Mr Lightman submitted that although clause 11 of the Shareholders Agreement excluded the right of the director appointed by the First Shareholder to be involved in a board meeting, it did not operate so as to reduce the quorum for an effective meeting. Thus, without the participation of Mr Harvey, there could not be an effective board meeting to take the steps necessary to pursue proceedings against Mr Harvey. That would preclude the Company borrowing the necessary monies to fund those proceedings.
24. Despite the valiant attempts of Mr Lightman, I find this argument, as regards the pursuit by the Company of proceedings against Mr Harvey, wholly unsustainable. It seems to me clear that, in the circumstances here, Mr Bamford is expressly given "full authority" on behalf of the Company to litigate the claim against Mr Harvey. If the Company needed to borrow money to fund such litigation, I consider that on any sensible construction of clause 11, Mr Bamford had the authority to do so and Mr Harvey was bound to "take all steps within [his] power" to assist. But in any event, there is no evidence before the court that such borrowing was required. The fact that the Company could not pay more than £500,000 towards the £3.5 million due to BAE cannot establish that it would be unable to pay the very much lower sums required to bring proceedings for this debt against Mr Harvey. There is no reason, on the evidence, to suppose that the Company did not receive the £4 million due under the Redrow Agreement on 3 January and that insufficient monies remain out of that payment to fund this litigation. Alternatively, there is no evidence that Mr Bamford on behalf of the Company could not negotiate a conditional fee agreement with the Company's solicitors or any necessary borrowing facilities with the Company's bank.
25. Since I therefore find that Mr Bamford could have arranged for the Company to commence proceedings in its own right against Mr Harvey, should this application be refused? In Cinematic Finance Ltd v Ryder & ors [2010] EWHC 3387 (Ch), I refused permission for a derivative claim to continue that had been commenced by the owner of the overwhelming majority of shares in the relevant companies. I stated as follows:

"11. ... in my judgment the Act is not seeking to change the basic rule that a claim that lies in a company can be pursued only by the company or to disturb the fundamental distinction between a company and its shareholders. There is nothing to suggest that the Act intended such a radical reversal of longstanding and fundamental principles. It is relevant that this part of the Act has its genesis in the Report of the Law Commission on Shareholder Remedies, Law Commission No. 246 (1997).

That report states at the outset in paragraph 1.2:

"The focus of the project was on the remedies available to a minority shareholder who is dissatisfied with the manner in which the company of which he is a member is run."

12. The Report proceeded to set out "Guiding Principles" that the Law Commission applied as governing its proposals for reform of the law. The first of these is expressed as follows at paragraph 1.9:

"(i ) Proper plaintiff

Normally the Company should be the only party entitled to enforce a cause of action belonging to it. Accordingly, a member should be able to maintain proceedings about wrongs done to the Company only in exceptional circumstances."

13. Although this part of the Act does not completely mirror the approach to be found in a combination of the Law Commission's draft bill and draft procedure rules, it clearly reflects the overall approach in the Law Commission's proposal and, in my view, one would expect very different language in the Act if it were adopting such a radically different approach that involved discarding the Guiding Principle that I have quoted. Indeed, in the Act the governing provision for the grant of permission by the court to continue a derivative claim is section 261(4) which makes clear that this is a discretion resting in the court.

14. Whilst the discretion must, of course, be exercised in accordance with established principles, in my judgment this is one such principle. I would not go so far as to say that it could never be appropriate for a derivative claim to be brought by a shareholder holding the majority of the shares in a company. A judge must be cautious about using the word "never" when faced with a statutory discretion and when this is not one of the enumerated circumstances in section 263(2) in which permission must be refused.... But in my judgment, only in very exceptional circumstances could it be appropriate to permit a derivative claim brought by a shareholder in control of the company. For my part, I find it difficult to envisage what those exceptional circumstances might be."

26. In Stimpson v Southern Private Landlords Association [2009] EWHC 2072 (Ch), [2010] BCC 387, Judge Pelling QC (sitting as a judge of the High Court) refused permission to continue a derivative claim on a number of grounds. Near the decision of his judgment, he said this (at [46]):

"There remains one final factor that is significant. Under the old law if there was no wrongdoer control of the company, permission would be refused for the obvious reason that in the circumstances there was no need for derivative proceedings to be commenced. It was submitted on behalf of the claimant that these principles do not appear in the statute and therefore are no longer relevant. I am doubtful if that is correct. If the statute is followed strictly, the court is required to consider whether a prima facie case is established - see section 261(2). In considering that question, the court is bound to have regard, not merely to the factors identified in Sections 263(3) and (4), but to any other relevant consideration since Sections 263(3) and (4) are not exhaustive. It is open to the first claimant to requisition an EGM, obtain if he can a replacement Board and that Board can if it judges it appropriate to do so, applying the duties imposed upon them by Sections 172, authorise the litigation. This factor is at least a powerful one that negatives the giving of permission and may be overwhelming."

27. Subsequent to the judgment in Stimpson but before the judgment in Cinematic Finance, the Inner House of the Court of Session delivered its judgment in Wishart v Castlecroft Securities Ltd [2009] CSIH 65, [2010] BCC 161. At first instance, the Lord Ordinary had considered that unless those responsible for the act or omission complained of remained in majority control, permission to bring a derivative claim must be refused under the analogous provisions of the Act concerning Scotland. On a reclaiming motion, the Inner House disagreed with that view. In the opinion, Lord Reed made detailed reference to the Law Commission report and noted that it had recommended that the new derivative procedure should involve "more modern, flexible and accessible criteria for determining whether a shareholder can pursue the action". After considering the statutory provisions, Lord Reed stated specifically as regards the views of the Lord Ordinary (at [38]):

"Nor...can we endorse a rule that leave can only be granted where the directors whose breach of duty is in issue were and remain in majority control: in practice, that is likely to be the position in many cases where leave is appropriately granted, but, as we have explained, one of the objects of the 2006 Act was to introduce more flexible criteria than the former "fraud on the minority" exception to the rule in Foss v Harbottle. The common law requirement of "wrongdoer control", in particular, had given rise to difficulty in a number of cases ... and is not repeated in s. 268."

28. Wishart was not cited to this court in Cinematic Finance. On that basis, Mr Lightman submitted that the fact that Mr Harvey is not in control of the Company and that clause 11 of the Shareholders Agreement might enable a claim to be brought in the name of the Company should not be held to preclude a derivative claim. He argued that Mr Harvey would surely have sought to object to the use of clause 11 to bring proceedings if it had been adopted; and he pointed out that on receipt of the letter before action which expressly indicated that a derivative claim would be brought, Mr Harvey had not responded by asserting that this was an inappropriate way of proceeding.
29. I accept that "wrongdoer control" is not an absolute condition for a derivative claim: if it were, it would be specified as such in s. 263(2) (or, in Scotland, s. 268(1)). Although Wishart is not technically binding upon me, it is of very strong persuasive authority and I respectfully follow it. It is clearly desirable that the interpretation of the statutory provisions (or their equivalents) should be the same in England as in Scotland. But I do not see anything in the opinion in Wishart to suggest that the potential for the Company itself to commence proceedings is not a relevant consideration in the exercise of the court's discretion. Moreover, the copious reference by the Inner House to the Law Commission report seems to me consistent with the approach I adopted in Cinematic Finance. The latter was indeed an extreme case, where those seeking to bring a derivative claim were in overall control of the company. Here, if there were real uncertainty as to whether Mr Bamford was able to avail himself of the provisions of clause 11, I think that the flexible approach to which Lord Reed referred could justify a derivative claim. Similarly, if his solicitors had in the letter before claim stated that he was going to proceed under clause 11 by procuring the Company to start proceedings and Mr Harvey (or his solicitors) had responded asserting that this was inappropriate, that might have been a ground justifying derivative proceedings. Mr Bamford is not compelled to launch the Company into litigation that would become embroiled in difficult arguments as to whether the Company was entitled to institute the proceedings. However, none of those particular features apply. It is impossible to avoid the conclusion that the mechanism of instituting a claim by the Company against Mr Harvey through clause 11 of the Shareholders Agreement was simply overlooked. There can be no other justifiable explanation for the complete absence of any reference to it in Mr Bamford's first witness statement or indeed the terms of his solicitors' letter before claim to Mr Harvey.
30. I do not consider that there is any relevance in the fact that Mr Harvey did not respond to that solicitors' letter by pointing out the availability of clause 11. It was not for him to tell Mr Bamford how to bring the threatened action against him. Further, I do not attach any significance to the failure to take this point in the initial response from Mr Harvey's solicitors to the service of proceedings in their letter of 26 June 2012. The proceedings were served on Mr Harvey by letter of 20 June 2012 and I accept that his solicitors were instructed only on 25 June.
31. Mr Harvey evidently appreciated the point soon afterwards, although I note that his solicitors did not write to Mr Bamford's solicitors pointing out that they considered that the proceedings were therefore incorrectly brought before he made his witness statement on 6 July. In that witness statement he makes this point, as well as taking another point that is of little relevance.
32. In his skeleton argument for this hearing, Mr Casement submitted that the appropriate course, to which Mr Harvey would not object, is for the proceedings to be reconstituted as an ordinary Part 7 claim. Since the proceedings, in my judgment, always could have been brought in the name of the Company and there is expressly no objection to them proceeding in the name of the Company, I consider that is the correct way forward. It is not elevating "wrongdoer control" to a preclusive condition for the court to hold that when proceedings clearly can be brought in the name of the Company and there is no objection raised on that ground, they should be brought in the name of the Company. The first "guiding principle" set out by the Law Commission that is quoted in Cinematic Finance remains applicable. I shall therefore refuse permission for this action to continue as a derivative claim and order that it be reconstituted. I shall hear counsel as to the appropriate and most efficient directions to be given so that the action can continue accordingly.

Note 1   All statutory references are to this Act, save as otherwise stated.    [Back]