England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Rolls Building, Royal Courts of Justice, 7 Rolls Buildings, Fetter Lane, London EC4A 1NL
		30/11/2012

Mr Justice Newey :

1. In this case, the applicants seek relief under section 25 of the Civil Jurisdiction and Judgments Act 1982 ("the CJJA") in connection with proceedings they have brought in the British Virgin Islands ("the BVI"). The defendants to those proceedings are (a) the respondent to the present application, Mr Manmohan Varma, and (b) Nilon Limited ("Nilon"), a company incorporated in the BVI of which Mr Varma is the sole director and also, as things stand, the only registered shareholder. The applicants allege that Mr Varma has been wrongfully causing Nilon to incur substantial expenditure on the BVI proceedings and that, if no injunction is granted, he is likely to continue to do so. On that basis, they have applied for orders:

i) Restraining Mr Varma, except to a very limited extent, from procuring or permitting expenditure by Nilon in connection with legal or other costs of the BVI proceedings;

ii) Requiring Mr Varma to disclose information as to the quantum of expenditure by Nilon to date on the BVI proceedings; and

iii) Ordering Mr Varma to repay to Nilon any sums that may have been wrongfully expended.

For his part, however, Mr Varma resists any suggestion that he has acted wrongfully and denies that any order should be made in the applicants' favour.

The background

The second applicant, Mr Bhagwan Mahtani, has a substantial beneficial interest in the first applicant, Royal Westminster Investments SA. He is also a son-in-law of the third applicant, Mr Sunder Dalamal, who is himself a brother of the fourth applicant, Mr Nari Dalamal.

The BVI proceedings concern a rice venture which the applicants and Mr Varma agreed to pursue together in Nigeria. In its present form, the Statement of Claim includes the following allegations:

i) It was orally agreed between Mr Varma and the second, third and fourth applicants at a meeting on 25 October 2002 that 57.5% of the issued shares in Nilon, which was to be formed for the purposes of the venture, would be issued to the applicants;

ii) When Nilon was incorporated a couple of weeks later, a collateral agreement arose between the second, third and fourth applicants, Mr Varma and Nilon for the issue of shares by Nilon to the applicants in accordance with the terms of the joint venture agreement allegedly entered into on 25 October;

iii) In breach of both alleged agreements, no shares in Nilon have ever been issued to the applicants;

iv) The applicants are therefore entitled to, among other things, specific performance of the agreements, rectification of Nilon's register of members and damages.

On 5 May 2010, the applicants applied to the BVI Commercial Court for permission to serve proceedings on Mr Varma in England, where he lives. At that stage, no collateral agreement was alleged; the proposed proceedings primarily sought rectification of Nilon's register of members and relief relating to Mr Varma's alleged breach of the joint venture agreement. The application was refused by the Judge, Bannister J, on the basis that there was no real issue to be tried as between the applicants and Nilon. Bannister J indicated, however, that he would consider the matter again if the applicants re-formulated their pleaded case so that it included a viable claim against Nilon to which Mr Varma was a necessary and proper party.

On 10 May 2012, the applicants renewed their application for permission to serve out of the jurisdiction. By now, a claim that Nilon was in breach of a collateral agreement had been added to the draft proceedings. In the light of this change, Bannister J granted permission to serve Mr Varma in England.

The applicants issued proceedings in the BVI on 11 May 2010. Thereafter, the proceedings were served on both Nilon and Mr Varma.

On 5 July 2010, Nilon filed an application in the BVI asking for a declaration that the Court should not exercise its jurisdiction in respect of the claim against it or, alternatively, for the proceedings to be stayed on the ground of forum non conveniens.

On 6 August 2010, Mr Varma filed an application in the BVI for service of the applicants' proceedings on him to be set aside on the footing that there was no serious issue to be tried as between the applicants and Nilon to which he could be a necessary and proper party.

By a judgment delivered on 21 October 2010, Bannister J rejected Nilon's application but concluded that the claim as pleaded did not show there to be a real issue which it was reasonable for the Court to try as between the applicants and Nilon. Bannister J did not accept that there was a sufficient basis for the collateral agreement alleged by the applicants. He also took the view that there was no necessary connection between the claim for breach of the collateral agreement and the applicants' allegation that Mr Varma had breached a joint venture agreement.

Following Bannister J's decision, Nilon applied for the claims against it to be struck out or, alternatively, for summary judgment in its favour. The application was heard on 14 December 2010, and Bannister J gave judgment in Nilon's favour on 21 December.

The applicants appealed both Bannister J's judgment of 21 October 2010 and that of 21 December.

The appeal was heard by the BVI Court of Appeal on 3 and 4 May 2011. Nilon appeared by local counsel, Mr Scott M. Cruickshank of Lennox Paton. Mr Varma was represented both by local counsel, Mr Ray Ng of Ogier, and by Mr Richard Snowden QC.

By a judgment of 16 January 2012, the BVI Court of Appeal allowed the applicants' appeals and ordered Nilon and Mr Varma to pay the applicants' costs. The Court took the view (see paragraph 51 of the judgment) that:

"there is between the appellants and Nilon a real issue which it is reasonable for the court to try, that issue being the appellants' claim against Nilon for rectification of its register of members".

The Court further considered that Mr Varma "is a necessary and proper party to the claim brought by the appellants against Nilon for rectification of its register" (paragraph 52 of the judgment).

On 16 April 2012, the BVI Court of Appeal refused applications by Nilon and Mr Varma for permission to appeal to the Privy Council. An application for permission to appeal has since been made direct to the Privy Council, but its outcome is not yet known.

Nilon and Mr Varma each served a Defence in the BVI proceedings on 15 June 2012. I shall refer to Nilon's Defence later in this judgment. So far as Mr Varma's is concerned, among other things he (a) denies that there was any agreement for the applicants to acquire any shares in Nilon and (b) alleges that any agreement would anyway have been repudiated by the issue of proceedings in Nigeria by companies owned by the second applicant and his brother in which they dispute Nilon's ownership of a Nigerian company, Veetee Rice Nigeria Limited.

The application now before me was issued on 22 June 2012.

The Civil Jurisdiction and Judgments Act 1982

Section 25 of the CJJA, pursuant to which the application is made, empowers the Court to grant interim relief where proceedings have been brought in another jurisdiction. Sub-section (7) explains that such relief can be interim relief of any kind that the Court has power to grant in proceedings relating to matters within its jurisdiction, other than:

"(a) a warrant for the arrest of property; or

(b) provision for obtaining evidence".

The Court may, however, refuse to grant relief "if, in the opinion of the court, the fact that the court has no jurisdiction apart from [section 25] in relation to the subject-matter of the proceedings in question makes it inexpedient for the court to grant it" (sub-section (2)).

Section 25 was enacted to give effect to article 24 of the 1968 Brussels Convention on jurisdiction and the enforcement of judgments in civil and commercial matters, but it has since been enlarged in scope. The power to grant interim relief that it confers is nowadays exercisable in relation to proceedings anywhere in the world.

The Court adopts a two-stage approach when considering whether to grant relief under section 25. In Refco Inc. v Eastern Trading Co. [1999] 1 Lloyd's Rep. 159, Morritt LJ explained (at 170-171):

"The scope and effect of s. 25 of the Civil Jurisdiction and Judgments Act, 1982 has recently been considered by this Court in Crédit Suisse Fides Trust S.A. v. Cuoghi, [1997] 3 W.L.R. 871…. [I]t was implicit in all the judgments that the approach of the Court in this country to an application for interim relief under s. 25 is to consider first if the facts would warrant the relief sought if the substantive proceedings were brought in England. If the answer to that question is in the affirmative then the second question arises, whether, in the terms of s. 25(2), the fact that the Court has no jurisdiction apart from the section makes it inexpedient to grant the interim relief sought."

The parties' cases in brief outline

The application with which I am concerned is rooted in the general principle that a company's money should not be expended on disputes between shareholders. The applicants, for whom Mr Philip Marshall QC and Mr James Mather appear, contend that the principle applies in relation to the BVI proceedings, which (so it is said) relate to what is in substance a dispute between shareholders. The applicants complain that Mr Varma has nonetheless caused Nilon to incur substantial expenditure in connection with the BVI proceedings. In the circumstances, it would, Mr Marshall argued, be appropriate for the Court to grant the injunctive and other relief sought were the substantive proceedings brought in England; if the balance of convenience is relevant, the justice of preserving the assets of the company to which the applicants lay claim (via its shares) is a powerful consideration, and Mr Varma can be expected to be in a position to fund his own defence without depleting the company's assets. Mr Marshall further submitted that the fact that the Court has no jurisdiction apart from section 25(2) of the CJJA does not make it inexpedient to grant relief: the orders would be made against an individual resident in this jurisdiction, would not conflict with any order made in the BVI and would promote an object which might reasonably be assumed to find favour with the BVI Courts.

In contrast, Mr Stuart Ritchie QC, who appears for Mr Varma, disputed that any relief should be granted to the applicants. One of the objections Mr Ritchie advanced was to the effect that the applicants have not made any substantive claim against Mr Varma to which the orders sought could be ancillary: the BVI proceedings do not include any allegation that Mr Varma has caused Nilon to incur expenditure wrongfully, and any such claim would anyway have to be advanced on behalf of Nilon rather than by the applicants personally. Further, there is (it is argued) no cogent evidence that Mr Varma has acted improperly in the past or will do so in the future: Nilon has not involved itself with the substance of the dispute relating to its shares and is not proposing to; its role would be even more limited but for the applicants' insistence on maintaining that Nilon is in breach of a collateral agreement. Even supposing there to be a serious question to be tried with regard to Mr Varma's conduct, damages would (Mr Ritchie submitted) provide an adequate remedy: the applicants do not have any proprietary claim, and, far from showing that Mr Varma could not satisfy a money judgment, the evidence indicates that he could. Mr Ritchie suggested that it would not have been appropriate for the Court to grant prohibitory relief, let alone a mandatory injunction, even if the substantive proceedings had been in this jurisdiction. As, however, the substantive proceedings are in the BVI, the application is, according to Mr Ritchie, objectionable on the further grounds that (a) the proposed order for the disclosure of information would fall foul of section 25(7)(b) of the CJJA and (b) the relief sought by the applicants would represent an unwarranted interference with case management by the BVI Courts. Mr Ritchie also took points in relation to delay and the breadth of the proposed order.

The law relating to expenditure by companies on disputes involving shareholders

In Re Crossmore Electrical and Civil Engineering Ltd [1989] BCLC 137, Hoffmann J said (at 138) that "[i]t is a general principle of company law that the company's money should not be expended on disputes between the shareholders". Hoffmann J cited as authority the decision of Wickens V-C in Pickering v Stephenson (1872) LR 14 Eq 322. In that case, the council of administration (or directors) of a Turkish company had brought proceedings for criminal libel against the plaintiff, who was a shareholder in the company. The plaintiff instituted a minority shareholder's action and succeeded in obtaining an injunction restraining the members of the council of administration from applying any moneys of the company in or towards payment of costs of the libel proceedings. Wickens V-C said (at 339-340) that the "principle of jurisprudence" he was asked to apply was "that the governing body of a corporation, that is in fact a trading partnership, cannot, in general, use the funds of the community for any purpose other than those for which they were contributed". He went on (at 340-341):

"It seems to me that where a quasi partnership of this sort is divided into a majority and minority who differ on a question of internal administration, and litigation results from the difference, it is contrary to the spirit of the partnership to pay the expense of the litigation out of the general fund; and that is independent of the question whether the majority is overwhelming or a bare majority".

Wickens V-C concluded (at 341) that the payment by the company of costs of the libel proceedings was ultra vires.

The principle Hoffmann J identified in Crossmore has featured particularly in cases involving unfair prejudice petitions under section 459 of the Companies Act 1985 or, now, section 994 of the Companies Act 2006. Crossmore was one such. The company in question there was both the subject of a creditor's winding-up petition and a party to a section 459 petition. Hoffmann J held that relief granted under section 127 of the Insolvency Act 1986 should not extend to expenditure by the company on defending the section 459 petition since such expenditure "would not be in the ordinary course of business". Hoffmann J noted (at 138):

"The company is a nominal party to the s 459 petition, but in substance the dispute is between the two shareholders".

Other unfair prejudice cases include Re Milgate Developments Ltd [1991] BCC 24, Re a company (No 004502 of 1988), ex p. Johnson [1992] BCLC 701, Re a Company No. 001126 of 1992 [1994] 2 BCLC 146, Arrow Trading & Investments Est. 1920 v Edwardian Group Ltd [2004] BCC 955 and Pollard v Pollard, unreported, 20 July 2007. The law was reviewed in some detail by Lindsay J in Re a Company No. 001126 of 1992. He concluded (at 155-156) that the authorities suggested the following:

"Firstly, that there may be cases (although it is unlikely nowadays when wide objects clauses are the norm) where a company's active participation in or payment of its own costs in respect of active participation in a s 459 petition as to its own affairs is ultra vires in the strict sense.

Secondly, leaving aside that possible class, there is no rule that necessarily and in all cases such active participation and such expenditure is improper.

Thirdly, that the test of whether such participation and expenditure is proper is whether it is necessary or expedient in the interests of the company as a whole (to borrow from Harman J in ex p Johnson).

Fourthly, that in considering that test the court's starting point is a sort of rebuttable distaste for such participation and expenditure, initial scepticism as to its necessity or expediency. The chorus of disapproval in the cases puts a heavy onus on a company which has actively participated or has so incurred costs to satisfy the court with evidence of the necessity or expedience in the particular case. What will be necessary to discharge that onus will obviously vary greatly from case to case.

Fifthly, if a company seeks approval by the court of such participation or expenditure in advance then, in the absence of the most compelling circumstances proven by cogent evidence, such advance approval is very unlikely…".

The principle that a "company's money should not be expended on disputes between the shareholders" is not confined to unfair prejudice petitions. It has been applied to a just and equitable petition brought by a shareholder: see Re A & BC Chewing Gum Ltd [1975] 1 WLR 579 (especially at 592). It is capable of operating, too, in relation to a derivative claim: see Carlisle & Cumbria United Independent Supporters' Society Ltd v CUFC Holdings Ltd [2010] EWCA Civ 463, [2011] BCC 855, at paragraph 24. In Smith v Butler [2011] EWHC 2301 (Ch), Judge Behrens, sitting as a Judge of the High Court, took the view that the principle was in point in relation to an application by a shareholder for a general meeting to be ordered under section 306 of the Companies Act 2006, on the basis that "all of the issues in the claim are in substance a dispute between shareholders" (paragraph 122).

In Jones v Jones [2002] EWCA Civ 961, [2003] BCC 226, the Court of Appeal thought that the principle might be applicable only rarely to an action brought by a company. On the facts, the Court did not consider that the principle applied to an action in which a company alleged misfeasance by one of its shareholders even though the factual basis for that action overlapped with that underlying an unfair prejudice petition brought by the defendant to the action. Arden LJ (with whom Rix LJ and Douglas Brown J agreed) said:

"53 That principle clearly applies to participation by a company in s.459 proceedings brought by a member. However, there is no case where it has been applied in a duly authorised corporate action. As Mr Kosmin submitted, it is difficult to see how it can apply to such an action unless it is said that the action was brought under the authority of directors who were motivated not by the company's interests but by a desire to further the interests of shareholders. A corporate action could be brought which was in truth a shareholders' dispute, for example to set aside an irregular allotment of shares made by a previous board. This might be said to be a mirror image of a situation which arose in Re Sherborne Park Residents Co Ltd (1986) 2 BCC 99,528. In that case Hoffmann J refused to make a pre-emptive order as to costs against the company in s.459 proceedings where it was claimed that there had been an irregular allotment of shares. Hoffmann J refused to make the order because, although the irregular allotment was a breach of the company's articles, in substance the petitioner was seeking a personal remedy, and thus it was not appropriate to make a pre-emptive order as to costs against the company.

54 Circumstances of that kind may well, however, be very rare. In the present case Mr Hollington has not, in my judgment, shown that the Chancery action is in substance part and parcel of the shareholders' dispute. There is almost total overlap in the factual material but separate relief is claimed in favour of Incasep [i.e. the company] on the grounds of breach of duty to it. There is no suggestion that (but for the narrower submission) the action was one which could not be, or was not being, properly brought by Incasep. The fact that the same relief could have been claimed by William and Susan [who held the other shares in the company] on a petition brought by them under s.459 does not mean that relief had to be sought in that way. The situation might have been very different if the Chancery action had clearly been brought in response to s.459 proceedings".

Jones v Jones was followed by Lawrence Collins J in BAS Capital Funding Corporation v Medfinco Ltd [2003] EWHC 1798 (Ch), [2004] ILPr 16 (at paragraph 206), but it was distinguished by Judge McCahill QC in Pollard v Pollard. In the latter case, a company was restrained from using its funds to prosecute a claim it had brought against a shareholder soon after he had launched an unfair prejudice petition. Judge McCahill expressed the view that there was "a strong case that the cross-claim has been brought for improper purposes".

Where an unfair prejudice petition has been brought, it will often be appropriate for the company's role to be limited to giving disclosure and attending judgment, in particular so that it is in a position to make submissions on any issue as to whether the company should be ordered to buy back shares. However, Re a Company No. 001126 of 1992 indicates that there is no absolute rule to that effect; whether a company's active participation in an unfair prejudice petition is proper depends on "whether it is necessary or expedient in the interests of the company as a whole". In deciding how far a company should participate in other litigation involving shareholders, a director must similarly be guided by the interests of the company.

Interim injunctions restraining the use of company money to meet legal costs have been granted in a number of cases. In Re Milgate Developments Ltd and Re a company (No 004502 of 1988), individual respondents to section 459 petitions were restrained from causing or procuring the companies to be involved in the petitions by respectively Mr Edward Nugee QC, sitting as a Deputy High Court Judge, and Harman J. In Arrow Trading & Investments Est. 1920 v Edwardian Group Ltd, Sir Francis Ferris restrained the company from expending money on section 459 proceedings, and a similar order appears to have been made in Pollard v Pollard, where there was again a pending section 459 petition. An order restraining expenditure was also made in a section 459 context in Corbett v Corbett [1998] BCC 93.

In several of these cases, it was clear that inappropriate expenditure had taken place in the past or was contemplated. In Re Milgate Developments Ltd, Mr Nugee QC could "see no possible justification for the companies incurring further expense in taking part in this dispute" (see 28). In Re a company (No 004502 of 1988), ex p. Johnson, it was "conceded that some part of that money had been wrongly spent by the company" so there was "established misfeasance" (see 237). In Corbett v Corbett, the position was that "any action which … ha[d] been taken purportedly in the name of the company … ha[d] been taken without any proper instructions at all from the company" and there was no prospect of ratification (see 99). In the Arrow Trading case, Sir Francis Ferris concluded that the company did not have "a separate and independent position" and so should not be taking the steps it was envisaging.

It seems plain, however, that it can be appropriate for an interim injunction to be granted even where it is not certain that there has been or will be inappropriate expenditure. In Pollard v Pollard, Judge McCahill regarded it as sufficient that there was a "strong case" that there had been impropriety. In other contexts, the Courts do not regard even that as a necessary requirement for the grant of an interim injunction. Provided that the Court is satisfied that there is a "serious question to be tried", the Court will ask itself (a) whether damages would be an adequate remedy for a party injured by the Court's grant of, or its failure to grant, an injunction and (b) if not, where the balance of convenience lies (see e.g. American Cyanamid Co v Ethicon Ltd [1975] AC 396 and the White Book at 15-7). I can see no reason why the Court should not adopt the same approach when considering whether to grant an interim injunction restraining expenditure on legal costs.

In Corbett v Corbett, an order for the repayment of costs was made at an interim stage. Judge Howarth said (at 101):

"This case, it seems to me, is dealing with a situation where the company has never given any authority to any firm of solicitors to do anything on its behalf in these proceedings and it seems to me that in those circumstances there is no good reason at all why an order for immediate repayment or at least reimbursement within a reasonable time from today should not take place".

In contrast, Harman J refused to order repayment in Re a company (No 004502 of 1988), ex p. Johnson. He expressed the view (at 238) that there would be power to make such an order under section 461 of the Companies Act 1985 (now section 996 of the Companies Act 2006), but that the jurisdiction "does not arise until the court has decided that the sec. 459 petition is justified". In the meantime, the petitioner had no locus standi to apply for repayment:

"he neither being the board, nor suing on behalf of the company, but simply being a shareholder exercising his right to petition the court under sec. 459".

The petitioner, Harman J observed, "seeks orders for payments to the company but he does not represent the company" (see 239).

The Court of Appeal also declined to make an interim order for the repayment of costs in Jones v Jones. While it did not consider the principle that a "company's money should not be expended on disputes between the shareholders" to be in point (see paragraph 26 above), the Court considered that an allegation of breach of undertaking raised a serious issue to be tried. It nonetheless declined to make an order for repayment. Arden LJ said (in paragraph 47):

"… I would not order William or Sarah to repay any costs at this stage. I do not consider that the high hurdle necessary before a mandatory interim injunction will be granted has been passed".

Mr Marshall pointed out that the basis on which mandatory interim injunctions are granted is fundamentally the same as that on which prohibitory interim injunctions are granted. In this context, I was referred to National Commercial Bank Jamaica Ltd v Olint Corpn Ltd (Practice Note) [2009] UKPC 16, [2009] 1 WLR 1405. There, Lord Hoffmann, delivering the opinion of the Privy Council, said this (in paragraph 19) after referring to Lord Diplock's judgment in the American Cyanamid case:

"There is however no reason to suppose that, in stating these principles, Lord Diplock was intending to confine them to injunctions which could be described as prohibitory rather than mandatory. In both cases, the underlying principle is the same, namely, that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other: see Lord Jauncey in R v Secretary of State for Transport, Ex p Factortame Ltd (No 2) (Case C-213/89) [1991] 1 AC 603, 682–683. What is true is that the features which ordinarily justify describing an injunction as mandatory are often more likely to cause irremediable prejudice than in cases in which a defendant is merely prevented from taking or continuing with some course of action: see Films Rover International Ltd v Cannon Film Sales Ltd [1987] 1 WLR 670, 680. But this is no more than a generalisation. What is required in each case is to examine what on the particular facts of the case the consequences of granting or withholding of the injunction is likely to be. If it appears that the injunction is likely to cause irremediable prejudice to the defendant, a court may be reluctant to grant it unless satisfied that the chances that it will turn out to have been wrongly granted are low; that is to say, that the court will feel, as Megarry J said in Shepherd Homes Ltd v Sandham [1971] Ch 340, 351, 'a high degree of assurance that at the trial it will appear that the injunction was rightly granted'".

Questions of standing (or, in the Latin expression used by Harman J in Re a company (No 004502 of 1988), ex p. Johnson, locus standi) may well arise more acutely, as it seems to me, in proceedings other than unfair prejudice petitions. In the absence of an unfair prejudice petition, the powers conferred by section 996 of the Companies Act 2006 will not be available. That being so, I cannot see how a shareholder suing only on his own behalf could have standing to ask for a final order for the repayment of costs by a director. Any such order would be based on the director having breached his duties to the company. As, however, the decision of the House of Lords in Johnson v Gore Wood & Co (No. 1) [2002] 2 AC 1 makes clear, only the company is generally entitled to claim for loss caused by such a breach. In Johnson v Gore Wood, Lord Bingham concluded (at 35-36) that the authorities support the following propositions:

"(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss…. (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding…. (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other."

Lord Millett said (at 61):

"A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company's property belongs to the company and not to its shareholders. If the company has a cause of action, this is a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf: see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 210."

Re A & BC Chewing Gum Ltd is consistent with these principles. In that case, the Court declared that expenditure on costs involved breaches of duty by the relevant directors (see 592). As Harman J explained in Re a company (No 004502 of 1988), ex p. Johnson, the relief was granted in "a separate, Chancery action in which the petitioner as an oppressed minority, under the rule in Foss v Harbottle (1843) 2 Hare 461, sued in his own name, joining the other two shareholders and directors and the company as defendants".

The next question is whether a shareholder suing exclusively on his own behalf has standing to apply for interim relief against a director. More specifically, can he ask the Court to grant an injunction restraining a director from causing the company to incur or meet legal costs? Can he seek a mandatory interim injunction requiring the director to make a (re)payment to the company in respect of past costs?

Section 37(1) of the Senior Courts Act 1981 confers a power to grant injunctions in wide terms. It states:

"The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so".

However, the power is not unfettered. Collins LJ explained the position as follows in Masri v Consolidated Contractors International (UK) Ltd (No. 2) [2008] EWCA Civ 303, [2009] QB 450 (at paragraph 175):

"As Lord Brandon of Oakbrook said in South Carolina Insurance Co v Assurantie Maatschappij 'De Zeven Provincien' NV [1987] AC 24, 40:

'although the terms of section 37(1) of the Act of 1981 and its predecessors are very wide, the power conferred by them has been circumscribed by judicial authority dating back many years.'

This point has often been reaffirmed by the House of Lords (and by the Privy Council) in relation to injunctions: see Gouriet v Union of Post Office Workers [1978] AC 435, 500–501, 516; Siskina (Owners of cargo lately laden on board) v Distos Cia Naviera SA [1979] AC 210, 256; Bremer Vulkan v South India Shipping [1981] AC 909, 979; British Airways Board v Laker Airways Ltd [1985] AC 58, 80–81; P v Liverpool Daily Post and Echo Newspapers plc [1991] 2 AC 370, 420–421; Channel Tunnel Group v Balfour Beatty Construction Ltd [1993] AC 334, 341, 360–361, and Mercedes Benz AG v Leiduck [1996] AC 284, 298 (Privy Council )".

The point was recently repeated by the Privy Council in Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Co (Cayman) Ltd [2012] 1 WLR 1721 (at paragraph 57).

In South Carolina Insurance Co v Assurantie Maatschappji 'De Zeven Provincien' NV [1987] AC 24, Lord Brandon of Oakbrook, delivering the leading speech in the House of Lords, said (at 40) that the authorities showed that the power of the High Court to grant injunctions is:

"subject to two exceptions to which I shall refer shortly, limited to two situations. Situation (1) is when one party to an action can show that the other party has either invaded, or threatens to invade a legal or equitable right of the former for the enforcement of which the latter is amenable to the jurisdiction of the court. Situation (2) is where one party to an action has behaved, or threatens to behave, in a manner which is unconscionable".

In the same case, Lord Goff of Chieveley (with whom Lord Mackay of Clashfern agreed) said (at 44-45) that he was "reluctant to accept the proposition that the power of the court to grant injunctions is restricted to certain exclusive categories". Lord Browne-Wilkinson (with whom Lord Keith of the Kinkel and Lord Goff of Chieveley agreed) shared the same doubts in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 (see 343).

Nonetheless, the weight of authority is to the effect that an interim injunction should normally be granted only in aid of an enforceable right. In Fourie v Le Roux [2007] UKHL 1, [2007] 1 WLR 320, Lord Scott of Foscote (with whom the other members of the House of Lords expressed agreement) said (in paragraph 32):

"without the issue of substantive proceedings or an undertaking to do so, the propriety of the grant of an interlocutory injunction would be difficult to defend. An interlocutory injunction, like any other interim order, is intended to be of temporary duration, dependent on the institution and progress of some proceedings for substantive relief".

Mr Marshall prayed in aid CPR 25.1(4), which states that the court "may grant an interim remedy whether or not there has been a claim for a final remedy of that kind". This means that a remedy can be granted in support of a claim for substantive relief even though the remedy in question is not mentioned in the claim form. I do not think, however, that the provision detracts from the general principle that an injunction should be in aid of an enforceable right.

In the circumstances, I cannot see how a shareholder suing exclusively on his own behalf could be entitled to obtain interim relief against a director in respect of breach of his duties to the company in proceedings having no other purpose. Any interim relief would have to be in aid of a claim for substantive relief, and the shareholder would have no standing to make such a claim. Any claim would have to be brought by or on behalf of the company.

Would the position be different if the shareholder (a) was already engaged in litigation with the director about something else (e.g. breach of a joint venture agreement) and (b) believed the director to be breaching his duties to the company in the context of that litigation (e.g. by causing the company to incur legal costs when that was not in the company's interests)? I do not think it would. It would remain the case that the shareholder was not making (and could not make on his own behalf) any claim for substantive relief in respect of the director's supposed breach of his duties to his company. There would still be no right enforceable by the shareholder to which interim relief could be in aid.

It follows that the answer to each of the questions set out in paragraph 37 above appears to me to be "No". A shareholder suing only on his own behalf is not in a position to ask the Court to grant an injunction restraining a director from causing the company to incur or meet legal costs. Nor is he entitled to seek a mandatory interim injunction requiring the director to make a repayment to the company in respect of past costs.

For completeness, I should add that the authorities show that a person ("X") bringing a claim against someone else ("Y") can sometimes obtain a freezing order against a third party ("Z") with a view to protecting Y's assets even though X himself has no claim against Z: see e.g. TSB Private Bank International SA v Chabra [1992] 1 WLR 231, C Inc plc v L [2001] 2 All ER (Comm) 446 and Revenue and Customs Commissioners v Egleton [2006] EWHC 2313 (Ch), [2007] Bus LR 44. I do not see this line of authority as in point in the present case. The application before me is focused on what (if any) remedies are available to the applicants in respect of Mr Varma's alleged breach of his duties to Nilon. No freezing order is sought as against either Nilon or Mr Varma.

The present case

Turning to the present case, I shall consider, first, matters bearing on whether the facts would warrant the relief that the applicants seek were the substantive proceedings in this jurisdiction and, secondly, whether the fact that the substantive proceedings are in the BVI rather than this jurisdiction makes it inappropriate for the Court to grant the relief claimed.

Standing

It seems to me that it is an objection to all the relief sought that the substantive proceedings do not (and could not) include any claim against Mr Varma for breach of his duties to Nilon.

The present application is founded on allegations of breach of such duties. The applicants' case before me is to the effect that there is a claim against Mr Varma for having improperly caused Nilon to incur and bear legal costs and that, in the absence of interim relief, he can be expected to continue so to act. However, the applicants have not made any claim for substantive relief in respect of Mr Varma's supposed breach of his duties to his company; in particular, no such claim features in the BVI proceedings. Further, I cannot see how any of the applicants could assert such a claim on his own behalf. Any claim would be vested in the company, and a shareholder could sue in respect of it (if at all) only by way of derivative action. The applicants, who are not as things stand even registered shareholders, can be in no better position.

The application is not, accordingly, made in aid of any claim for substantive relief; it is – to use an expression of Mr Ritchie's – "free-flying". That being so, the principles discussed in paragraphs 37-45 above mean, in my view, that the applicants would not be entitled to the relief sought were the substantive proceedings in this jurisdiction.

Restraining future expenditure

There are, as it seems to me, further reasons why it would not have been appropriate for the Court to grant a prohibitory injunction had the substantive proceedings been in this jurisdiction.

A first point relates to the strength of the claim against Mr Varma. I have been persuaded by Mr Marshall that it is seriously arguable that Mr Varma has caused Nilon to play too great a role in the BVI proceedings. On the other hand, I do not think it can be said that Mr Varma has clearly acted in breach of duty or is clearly intending to do so (compare the cases mentioned in paragraph 29 above). My reasons include these:

i) In a typical unfair prejudice case, it may well be plain that the dispute is in substance one between shareholders and that the company's participation in the proceedings should be very limited. There is somewhat more scope for argument as to Nilon's proper role in the BVI proceedings, not least because Nilon itself (and only Nilon) is alleged to have breached the alleged collateral agreement on the strength of which Bannister J ultimately gave permission for service out of the jurisdiction;

ii) Nilon does not appear to have involved itself in the merits of the arguments about the alleged joint venture agreement. It also seems to have played a secondary role in the appeal to the BVI Court of Appeal. It was represented at the appeal by only local counsel, whereas Mr Varma's team also included an English Queen's Counsel;

iii) Mr Marshall made much of paragraphs 16 and 21 of Nilon's Defence, which contain denials. It can be seen, Mr Marshall said, that Nilon is (wrongly) taking a position in relation to the claim. Mr Ritchie accepted that it might have been preferable for paragraph 16 to take the form of a non-admission, but he pointed out that the Defence is relatively short. It is also fair to say that the Amended Statement of Claim to which the Defence was responding includes allegations directed at Nilon. For example, paragraph 27 of the Amended Statement of Claim, which is denied in paragraph 21 of the Defence, asserts an estoppel against Nilon as well as Mr Varma, in part on the basis of conduct of Nilon. Moreover, it is Nilon alone that is said to have breached the alleged collateral agreement;

iv) So far as I am aware, the BVI Courts have not thus far criticised the role Nilon has played in the BVI proceedings, and it was not until earlier this year (notably, in a letter of 10 May) that the applicants first suggested that Nilon was adopting an inappropriate stance;

v) In all the circumstances, it is by no means inconceivable that Mr Varma believed it to be "necessary or expedient in the interests of the company as a whole" (to quote from Harman and Lindsay JJ – see paragraph 24 above) for Nilon to take part in the BVI proceedings to the extent that it has;

vi) In any case, Mr Varma is at present Nilon's sole shareholder, and he denies that the applicants have any right to shares in Nilon. Were Mr Varma to be correct about this, then, provided at least that Nilon's solvency was not in question (and there is no evidence that it is), he would presumably be entitled to approve Nilon's expenditure on legal costs (if on no other basis, pursuant to the principle in In re Duomatic Ltd [1969] 2 Ch 365).

Having regard to the principles to be derived from American Cyanamid Co v Ethicon Ltd, it is next relevant, I think, to ask whether damages would be an adequate remedy if no injunction is granted. The evidence suggests that they would. The witness statement in support of the application includes a passage in the following terms:

"In any event, as PCB [i.e. Mr Varma's solicitors] averred in their letter of 14 February 2012, the Respondent [i.e. Mr Varma] is 'a man of considerable substance' who is well able to fund the proceedings out of his own resources, so that it is difficult to conceive of how the injunction could cause him loss at all. Nonetheless, I believe that the First Applicant is also of substantial means …".

Far, therefore, from putting forward evidence that Mr Varma would not be able to meet any order for repayment that might ultimately be made against him, the witness statement proceeded on the basis that he had substantial means. A witness statement filed in answer to the application similarly noted that "[t]here appears to be no dispute between the parties that the Respondent who is a successful and well-known businessman, is a man of substantial means".

In the course of the hearing, Mr Marshall took a somewhat different line, saying that the applicants do not know where Mr Varma's assets are or how easy it would be to enforce any order against him. However, there is no evidence along these lines. The effect of the evidence is reflected in this sentence from the applicants' skeleton argument:

"It appears to be common ground that Mr Varma is a man of substantial means: he is perfectly able to fund his own defence without depleting the company's assets".

Mr Marshall sought to draw an analogy with the grant of an injunction to protect a proprietary right. He referred me to Mediterranea Raffineria Siciliana Petroli SpA. v Mabanaft GmbH, an unreported decision of the Court of Appeal dating from 1 December 1978. In that case, Templeman LJ said:

"A court of equity has never hesitated to use the strongest powers to protect and preserve a trust fund in interlocutory proceedings on the basis that, if the trust fund disappears by the time the action comes to trial, equity will have been invoked in vain".

However, the fact is that the applicants do not have any proprietary claim to the money being spent on legal costs. A company owns its own assets; it does not hold them on trust for shareholders, let alone for persons claiming to be entitled to shares.

Disclosure and repayment

The relief claimed in the application notice includes orders "requiring [Mr Varma] to disclose information as to the quantum of expenditure by Nilon to date on the BVI Proceedings" and "ordering [Mr Varma] to repay to Nilon any such sums as may have been wrongfully expended". The draft order attached to the application notice provides for Mr Varma to serve and file a witness statement giving details of sums expended or incurred by Nilon in connection with the BVI proceedings "broken down by reference to the hearing or stage of proceedings to which the expenditure concerned relates" and for the application for the repayment of sums expended by Nilon then to be listed for a further hearing.

It seems to me, however, that it would not have been right for the Court to make any order for repayment even if the substantive proceedings had been in this jurisdiction rather than the BVI. As already mentioned (paragraph 49 above), the applicants have not brought any substantive claim against Mr Varma in respect of the relevant expenditure, and they could not do so in their own right. Even, though, had such a claim existed, it could not, in my view, have been appropriate to order Mr Varma to make any payment in advance of his having been found liable at a trial. As matters stand, it has not been established that Mr Varma has committed any breach of duty. He should, moreover, have an opportunity to argue, if needs be, that he should be relieved of liability for any breach that may have been committed on the basis that he acted honestly and reasonably and ought fairly to be excused (see section 1157 of the Companies Act 2006 for the current English provision).

The simple fact is that the applicants are proposing that Mr Varma be required to make a payment in respect of a liability that has not been (and may never be) established and without any substantive claim having been brought in respect of it. They are doing so, moreover, in circumstances where there is no evidence indicating that, were Mr Varma ultimately to be held liable to compensate Nilon for breach of duty, he would be unable to satisfy an order or would not be susceptible to the jurisdiction of this Court (unlike Trumann Investment Group Ltd v Societé Generale SA [2002] EWHC 2621 (Ch), a decision of Judge Langan QC sitting as a Judge of the High Court to which Mr Marshall referred me, where it was not suggested that the defendants would be amenable to the jurisdiction of the Court should damages or compensation be awarded against them – see paragraph 42 of the judgment). While mandatory interim injunctions may not be different in kind from prohibitory ones (see paragraph 34 above), I do not think it could possibly be right to make an interim order for repayment in the circumstances of the present case.

Turning to the proposed order for the disclosure of information, Mr Marshall argued that this would be ancillary to the application for repayment. However, the right course appears to me to be to dismiss the application for repayment, and the application for disclosure must fail with it. There will no longer be any application to which disclosure could be ancillary.

Implications of the fact that the substantive proceedings are outside this jurisdiction

In Crédit Suisse Fides Trust SA v Cuoghi [1998] QB 818, Lord Bingham of Cornhill CJ said (at 831):

"It would be unwise to attempt to list all the considerations which might be held to make the grant of relief under section 25 inexpedient or expedient, whether on a municipal or a worldwide basis. But it would obviously weigh heavily, probably conclusively, against the grant of interim relief if such grant would obstruct or hamper the management of the case by the court seized of the substantive proceedings ('the primary court'), or give rise to a risk of conflicting, inconsistent or overlapping orders in other courts".

In the same case, Millett LJ noted (at 829) that, where an application is made under section 25 of the CJJA, a "highly material" consideration is "the likely reaction of the court which is seised of the substantive dispute". Similarly, Potter LJ, delivering the Court of Appeal's judgment in Motorola Credit Corpn v Uzan (No 2) [2003] EWCA Civ 752, [2004] 1 WLR 113, identified (at paragraph 115) one of the "particular considerations" which the Court should bear in mind when deciding whether it is inexpedient to make an order under section 25 of the CJJA as:

"whether the making of the order will interfere with the management of the case in the primary court e g where the order is inconsistent with an order in the primary court or overlaps with it".

In the present case, the relief I am asked to grant would not conflict with any order that the BVI Courts have made. Nonetheless, it seems to me that there is a real risk that acceding to the application before me would "obstruct or hamper the management of the case by the court seized of the substantive proceedings" (to use Lord Bingham's words). The orders claimed would mean that Nilon was unable to play any significant part in the BVI proceedings; it could not even apply to the BVI Courts for guidance as to what steps it should take in the proceedings. In my view, this represents an additional objection to the making of the orders sought. It would be inappropriate for me to make an order that could inhibit the ability of a BVI Court to give directions as to the role that a BVI company should play in substantive proceedings before the BVI Courts, especially when, as I have already indicated, there is scope for argument as to Nilon's proper role in the BVI proceedings.

Section 25(7)(b) of the CJJA

Mr Ritchie argued that the application for the disclosure of information falls foul of section 25(7) of the CJJA and, hence, that there is no jurisdiction to grant it. As mentioned above, section 25(7) states that the Court can grant interim relief of any kind that it has power to grant in proceedings relating to matters within its jurisdiction, other than a warrant for the arrest of property and "provision for obtaining evidence" (section 25(7)(b)). Mr Ritchie submitted that the disclosure sought by the applicants would amount to "provision for obtaining evidence".

Section 25(7)(b) was considered by Cresswell J in Kensington International Bank Ltd v Congo [2006] EWHC 1712 (Comm). He said this in paragraph 65(5) of his judgment:

"Although section 25(7)(b) excludes measures directed to obtaining evidence, it does not exclude interim relief designed to give the applicant information, for example, about the location of assets (Republic of Haiti v Duvalier; Re an application by Mr Turner and Mr Matlin, Court of Appeal, 7 June 1988). While section 25(7)(b) precludes an application under section 25(1) for the purpose of obtaining evidence for the prosecution of the claim on the merits, it does not preclude the making of an order for the purpose of preserving assets, even if a consequence of compliance with the order may be to provide the applicant with information and material of assistance to him in the prosecution of the substantive claim. A purpose of interim relief may be to preserve evidence, see section 7(1)(a) of the Civil Procedure Act 1997 and section 44(2)(b) of the Arbitration Act 1996, both of which use the word 'preserve' (see Gee Commercial Injunctions 5th Edition, paragraph 6.053)".

Mr Marshall argued that, in the present case, disclosure is not sought for the purpose of obtaining evidence for the prosecution of a claim on the merits, but rather as ancillary to the grant of interim relief (viz. an interim order for Mr Varma to repay Nilon). I might well have accepted this submission had I been persuaded that an interim order for repayment could be appropriate. However, I have in fact decided that there should be no interim order for repayment.

Other matters

In the light of the conclusions I have already arrived at, I do not need to address the points Mr Ritchie raised in relation to delay and the breadth of the relief sought.

Conclusion

The application will be dismissed.