England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY & COMPANIES LIST (ChD)

		The Rolls Building 7 Rolls Buildings Fetter Lane London EC4A 1NL
		16 October 2018

JUDGE SIMON BARKER QC :

1. The application before the court is for permission under section 261 of the Companies Act 2006 to continue a derivative claim. The applicant, Montgold Capital LLP ('the Claimant'), holds 50 per cent of the share capital issued by Agushia Limited (the relevant company), which was placed in administration by its director, Agnieszka Ilska ('the first defendant') on 28 November 2016. By the application notice, the Claimant also sought an order that its costs of the derivative action be indemnified out of Agushia's ("the Company's") assets.
2. During the hearing the Claimant's position in relation to the indemnity changed, with the result that this aspect of the application is not pressed if, as I indicated towards the end of the hearing I was provisionally minded to do, I make an order aimed at preserving Agushia's assets in the administration, which are in the order of £190,000 in cash, subject only to (1) payment of the minimum costs reasonably and necessarily incurred by the administrators to fulfil their duties as such pending conclusion of the litigation, and (2) prohibition of the use of any part of those monies to fund the administrators' own costs of the Claimant's ongoing claims against them, including, if permission is given, defending the derivative claim.
3. Section 261(2) provides, in effect, that unless the application and supporting evidence filed in support disclose a prima facie case for giving permission, the court must dismiss the application. That aspect of the application has been considered by Norris J on the papers. His order was made on 11 January 2018. There has also been a consent order varying the directions given. The prima facie case threshold was passed and Norris J's order recited that he considered that the evidence appeared to him to make out a sustainable case. By that order, the administrators (who are Mr Asher Miller, the eighth defendant, and Mr Henry Lan, the ninth defendant, both of David Rubin and Partners) were given permission to file evidence on behalf of Agushia in answer to the application, including, if so advised, witness statements from any other intended defendant to the derivative claim. The Claimant was given permission to file evidence in reply.
4. The eighth and ninth defendants and the Claimant evidently agreed that expert evidence as to the financial position of Agushia (1) at the time of its entry into administration on 28 November 2016, and (2) in March 2018 should be filed. They submitted a consent order for sequential exchange of reports and a joint report. I note here that Norris J added reasons to his approval of the consent order, which included that it would not be necessary to make findings as to the expert evidence, not least because so to do would be to take a wrong approach to a section 263 application and, potentially at least, usurp the function of a trial judge.
5. My task on this application is under section 263 and is to decide whether or not to give permission to continue the derivative claim.
6. Section 263(2) provides, in so far as relevant and in effect, that permission to continue must be refused if no person acting in accordance with section 171 of the Companies Act 2006, that is the duty to maintain the success of a company imposed upon directors, would seek to continue the claim. That leaves open scope for continuation in cases where the section 172 duty could properly be exercised by either continuing or not continuing a claim. It suffices, for passing through this gateway, that the court can envisage one or more such persons properly deciding to continue the claim. If the court is not bound to refuse permission to continue a claim it must then exercise a discretion one way or the other as to continuation.
7. Section 263(3) provides a non-exhaustive list of factors to be taken into account. In so far as relevant, the particular factors are: (a) whether the member seeking to continue the claim is acting in good faith; (b) the importance that a person acting in accordance with the section 172 duty, that is the 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 and would be likely to be authorised or ratified, which is not relevant ; (d) and (e) are also not relevant because the company is in deadlock; and, (f) which is relevant, whether the act or omission in respect of which the claim is brought gives rise to a cause of action, the member could pursue in his or its own right rather than on behalf of the company.
8. Further, section 263(4) requires the court to have particular regard to any evidence before it as to the views of the members who have no direct interest in the matter.
9. There are no such members in this case. There is no statutory reference to regard being had to the interests or views of creditors. Mr Shaw, counsel for the eighth and ninth defendants, submitted that where, as in his submission is the case here, the company is insolvent regard should be had to the views of creditors. I shall obviously return to this.
10. Agushia carried on the business of a restaurant known as "Yalla Yalla" at Winsley Street in London with popup restaurants elsewhere. No dividends have ever been paid by Agushia. The Claimant owns 50 per cent of Aguisha's issued capital. Neither the Claimant nor its controller, Mr Karim Mawji, nor anyone nominated by him is or at any material time was a director or employee of the company. Ms Ilska, the first defendant, owns 5 per cent of Agushia's issued shares and was at all material times and remains a director. Formally, she is the sole director. Jad Youssef, who is the second defendant, owns the remaining 45 per cent of Aguisha's issued shares. He was a director until 14 August 2015 and he then became a consultant. The Claimant's case includes that at all material times Mr Youssef was and remained a de facto or shadow director. The first defendant managed the restaurant business and was front of house; the second defendant was chef or head chef; and, the first and second defendants are said to be in a personal relationship.
11. Mr Philip Poyner, the third defendant, was or held himself out as finance director of the company. He may still be finance director. Ascent FD Philip Poyner Limited, the fourth defendant, was a company through which the third defendant Mr Poyner's services are provided.
12. Put very shortly, the Claimant's case is that at a time when (1) Mr Mawji and another restaurateur were negotiating to purchase A Limited for £1.05 million (from which the first and second defendants would receive £260,000) and a sale and purchase agreement was in circulation and supposedly under consideration by the first and second defendant and their lawyers, (2) a meeting had been convened by the first defendant for 2 December 2016, at which Mr Mawji, the first and second defendants and no doubt the third defendant were to consider Agushia's affairs, including its financial position, (3) unknown to the Claimant and/or Mr Mawji, the second defendant had been seeking employment as an executive chef at Comptoir Group PLC, which is the sixth defendant, ('Comptoir') and on 25 November had secured employment at a salary of £60,000 per annum, and (4) in order to thwart the sale to Mr Mawji and better their own position, the first and second defendants arranged for Agushia to enter administration and for what in substance was a pre-packaged sale to Comptoir (pre-packaged in the sense that it was to follow hard on the heels of the appointment of administrators), the sale was intended or likely to be at a price markedly lower than the £1.05 million and therefore at a price which was an undervalue.
13. The Claimant further contends that the pre-pack was achieved through an unlawful means conspiracy between the first, second, third, fourth, sixth, eighth and ninth defendants and two other persons. The first of these other persons is Mr Jonathan Sinclair, who is named as the fifth defendant. He is an accountant and an insolvency practitioner and is alleged to have had a finger in every slice of the conspiracy pie having (1) given initial advice to the first defendant, (2) effected the introduction of the first defendant to the eighth and ninth defendants, (3) been under consideration as a joint administrator with the eighth defendant, and (4) acted as an advisor and agent for Comptoir in its purchase of Agushia's business through the pre-pack.
14. The first defendant has said that she happened upon Mr Sinclair through an internet search. The Claimant challenges this explanation by reference to Mr Sinclair's track record. Comptoir is now listed on the AIM and has been since 2016. However, in the five or six years before that, so says Mr Mawji, at least four of its restaurant businesses went through insolvency processes at significant loss to creditors and in each case Mr Sinclair, the fifth defendant, was the insolvency practitioner engaged by the Comptoir business. The Claimant has contended that that coincidence is unlikely and that in reality Comptoir effected the introduction of the first defendant to the fifth defendant.
15. The other defendant not so far mentioned is Mr Chaker Hanna, the seventh defencdant, who is Comptoir's chief executive. The Claimant has pointed to evidence that Mr Hanna was involved in discussions with other defendants, including the eighth defendant, about the purchase of Agushia's business from administrators in the lead-up to the administration, and further that he was supplied with confidential financial information about Agushia, even without a nondisclosure agreement.
16. Those are, in very short order, the background facts that the Claimant relies upon.
17. There is ongoing litigation quite apart from the derivative claim. First, the Claimant is suing the eighth and ninth defendants as administrators for misfeasance or breach of duty and for their removal from office. Secondly, the Claimant is also suing the first, second, third and fourth defendants in section 994 unfair prejudice proceedings. The fifth, sixth and seventh defendants (that is Mr Sinclair, Comptoir and Mr Hanna) are not parties to either of those actions. On the Claimant's case they could not properly be parties importantly, but not exclusively, because they are all outsiders to the company and therefore not appropriate parties to a section 994 claim. Moreover, the fifth, sixth and seventh defendants are central to the alleged unlawful means conspiracy and, so it is submitted by Mr Pay, who is counsel for the Claimant, the logical course is to have a defined action to which these parties are defendants and the company, Agushia, a nominal defendant with the Claimant suing on its members' behalf. The party damaged by the conspiracy was Agushia, being deprived of its undertaking, and any loss to the Claimant is merely reflective.
18. Through Mr Shaw, who is counsel for the eighth and ninth defendants, those defendants contend that there is no good reason why the fifth, sixth and seventh defendants could not be joined to the section 994 proceedings and there is authority which supports such a course. The actual joinder of the fifth, sixth and seventh defendants to the section 994 proceedings is not in issue on this application, and although represented by a watching brief, the fifth, sixth and seventh defendants were not participants in this hearing.
19. As to representation, in addition to Mr Pay, who appeared for the Claimant, and Mr Shaw, who appeared for the eighth and ninth defendants, Mr Deacock appeared for the first and second defendants, but participated only on the issue of indemnification of the Claimant out of Agushia's assets in respect of the Claimant's derivative action costs which, in the event, fell away as an issue.
20. I now return to the threshold question under section 263(2). The first question is whether the court must refuse permission. Is it the case that no director intent upon fulfilling the duty to promote the company would seek to continue the claim? As Lewison J (as he then was) observed in Iesini v Westrip Holdings Ltd [2011] 1 BCLC 498 at [85], this first question is essentially a commercial decision. It involves weighing a wide range of factors including, (1) the size of the claim, (2) the strength of the claim, (3) the cost of the proceedings, (4) the company's ability to fund the proceedings, (5) the ability of potential defendants to satisfy a judgment, (6) the impact on the company if it lost the claim and had to pay not only its own costs but also the defendants' costs as well, (7) any disruption to the company's activities while the claim is pursued, (8) whether prosecution of the claim would damage the company in other ways, and (9) and so on. Further, and as Lewison J also observed, the court is not well-equipped to make commercial judgments except in a clear case.
21. Additional guidance has been given by Norris J in McCaskill v Fulton & Ors, the transcript of which is dated 31 October 2014. This judgment included a reminder that the court is not to embark on a mini-trial and the observation that the question under section 263(2) is whether the case advanced is the sort of case which a properly advised and governed company would lay out money on in pursuit of its own interests. I take that figuratively rather than literally, and as a reminder that there must be something more than a prima facie case and something worth litigating about.
22. Starting with (1) the size of the claim, this was a matter of significant disagreement between Mr Pay for the Claimant and Mr Shaw for the eighth and ninth defendants. The claim form puts the recovery at up to £2 million. What is sought financially is, first, whatever sums will restore the company to the position it was in in mid-November 2016, before the first defendant set off on what became the alleged conspiracy, ie on or before 14 November 2016; secondly, an account of profits from the sixth defendant, Comptoir; and thirdly, recovery of alleged defalcations from the first defendant. Mr Pay accepted during argument that to the extent that an account may overlap with damages for loss of the business over time, there may be double counting, although different profits are being looked at, and that he could not recover under both an enquiry as to damages for the loss of profit to Agushia and also an account of the profit made by the sixth defendant.
23. Mr Shaw submitted that the loss is really marked or capped by the difference between the headline figure in the sixth defendants offer to the eighth and ninth defendants for Agushia's business, £400,000 and the headline figure offered by LOJJ Limited which was Mr Mawji's offer vehicle, £525,000; in other words loss is capped at £125,000. In my view, Mr Shaw's submission is misconceived. There is credible evidence that a number of independent restaurateurs other than Mr Mawji had offered to buy Agushia's business or Agushia for more than £1 million in September and/or through to December 2015. Mr Mawji may have used these offers as the basis for his value and offer. Mr Mawji was also planning to fit out and trade from premises adjacent property to the Yalla Yalla restaurant, which was also being rented by Agushia but was unoccupied. I am not in a position to express any view as to the actual value of the business, but I accept that the realistic size of the claim is, at least potentially, significantly greater than £125,000.
24. I also recognise, as Mr Shaw submitted, that credit might well or would have to be given in some way up to the £400,000 that was consideration received into Agushia's estate. That might involve also reviewing how the money that was received has been expended. As to its value, therefore, I view this claim as worth laying out money on, in other words, one worth the candle.
25. Next is the strength of the claim. A fair starting point is that it is inherently improbable that disgruntled co-owners of a company would conspire with the company's financial advisor, specialist insolvency practitioners of standing, and a listed company as purchaser to put the company unnecessarily and wrongly through an insolvency process in order to deny the other shareholder any fruits from its investment. Be that as it may, Mr Mawji's evidence and Mr Pay's submissions, which drew attention to the events over time, and the nondisclosure by the eighth and ninth defendants, point to a realistic case in unlawful means conspiracy, with the essential elements, deliberate combination to a common intent, all identified and resulting in a case with a good deal of conviction.
26. Mr Pay was critical of the eighth and ninth defendants' approach to disclosure. Having been taken to the relevant passages in the transcript of the hearing before Chief Registrar Baister, the eighth and ninth defendants' initial disclosure was, it seems to me, lamentable and worthy of censure. The withholding of documents pointing to Mr Sinclair's involvement and Comptoir's original offer, which was £275,000, and its accepted offer, which apparently or appears to have been made after the deadline set by the eighth and ninth defendants themselves, is surprising and justifies some suspicion without good explanation. The explanation given, misunderstanding by the eighth and ninth defendants and their legal advisors, does not, in my judgment, seem to be a convincing explanation given the clarity with which disclosure was addressed, as appears from the transcript of the hearing before Chief Registrar Baister. The explanation as to the £400,000 offer being made out of time has been that an oral offer was made in time; at present that is uncorroborated by documents or detailed evidence.
27. Although there is little evidence answering the narrative told by Mr Mawji in his evidence, the eighth and ninth defendants have filed a detailed defence in the action by the Claimant against them and have therefore addressed the conspiracy claim in this way. In short, their answer was that they acted in accordance with their duties and were presented with a company which was clearly insolvent. Whether or not Agushia was insolvent has been the subject of much argument and was also the subject of expert evidence.
28. For my part, I am not at all persuaded that the experts approached the question of cash flow insolvency on the correct basis. They seem to me to have taken too late a starting point and, at least arguably, to have selected a period of five weeks from 28 November 2016 which gave a distorted view of cash flow. In addition, Mr Pay criticised the eighth and ninth defendants for concluding, if they did, that Agushia was balance sheet and cash flow insolvent without even enquiring as to possible sources of funding either by investment or deferred loan from the Claimant and/or Mr Mawji.
29. For these and other reasons debated during the hearing, I regard the state of the evidence as to Agushia's solvency as incomplete and presently inadequate. There is good reason for working on the premise that Agushia was not insolvent, but of course I am not making a finding of fact. What I can do is reject Mr Shaw's submission that Agushia was unquestionably insolvent when it entered administration in November 2016.
30. Even if Agushia was insolvent, that would not be a barrier of itself to a derivative claim. For this proposition I was referred to the judgment in Gamlestaden Fastigheter AB v Baltic Partners Ltd [2008] 1 BCLC 468.
31. As to (3) the cost of proceedings, (4) the company's ability to fund the proceedings, and (6) the impact on the company if it lost and had to pay both its own costs and those of the defendants, in this case these are not a material impediment. Certainly the costs are not insignificant. It is common ground that a derivative action will add up to one week to what is currently estimated to be a two-week trial and there would be case management beforehand. Mr Shaw submitted that the costs in total will be north of £2 million. The Claimant has already agreed in principle to give security for costs in the case against the eighth and ninth defendants and, in the section 994 proceedings, against the third, second, third and fourth defendants. In addition, the Claimant will be funding Agushia in its derivative claim and recognises that it is likely to have to give security for costs against the first to ninth defendants in relation to that derivative claim. Of course, if security is not given, the claims will come to a dead stop.
32. Also, and importantly, the Claimant did not press the application for an indemnity from Agushia's assets, which are some £190,000 in cash. During argument, I indicated that I was provisionally minded that, save for the reasonable cost of the minimum necessary work required of administrators pending the outcome of a trial, the Claimant's cash pot should be preserved. I also indicated that, as a means of monitoring the eighth and ninth defendants' drawing from Agushia's cash pot, I was minded to require the eighth and ninth defendants to give at least seven days' written notice to the Claimant of the amount in breakdown, including both work to be undertaken and work which had been undertaken, before making any drawing. On the basis that such restrictions would be imposed, the Claimant did not press this application. Accordingly, these considerations (the third, fourth and sixth) do not weigh at all significantly in favour of refusal of permission.
33. As to (5) the ability of potential defendants to satisfy judgment, the sixth defendant is an AIM listed PLC. The eighth and ninth defendants are principals or partners in David Rubin and Partners and are presumed by the Claimant to have some means personally. Recovering defalcations from the first defendant and the means of the second, third, fourth, fifth and seventh defendants are not the subject of any evidence on which I can place weight. Agushia's primary targets are therefore recovery from Comptoir and the eighth and ninth defendants, and I can and do work on the basis that they are reasonably likely to have means.
34. As to the seventh and eighth considerations, disruption of the company's business and whether the claim would damage the company in other ways, the critical disruption, that is the disappearance of the undertaking itself, is the very subject matter of the derivative action and such proceedings would not damage Aguisha in other ways.
35. Accordingly, on the basis of these factors, which are non-exhaustive, the obligation to refuse permission does not arise. That is not the end of the question. Mr Shaw made two overarching submissions: first, that the Claimant seeks to gamble with the money of others; and, secondly, that all the relief sought in the derivative action is available in the other proceedings on foot and may be accomplished by expanding the section 994 action.
36. As to the first point, it is unlikely that the Claimant will gamble with anyone's money but its own. The security for costs regime should adequately safeguard any concerns that might properly be raised on that front.
37. Mr Pay described the derivative action as a win-win situation for the company and its creditors irrespective of whether the person discharging the section 172 duty had regard to the members or to the creditors. This was on the basis that the current assets of Agushia are preserved and the unsecured creditors stand at £450,000. On this basis, the unsecured creditors might currently expect to be paid some 40 pence in the pound, though probably not that much. However, if the derivative claim was to succeed, they should do better and may even recover 100 pence in £1. Of course, some adjustment must be factored in for the cost of waiting for money, but in substance there is no significant downside and there is real potential for an upside. That submission is a powerful submission.
38. As to the second further factor, the availability of relief through other proceedings, it is clear that such relief is available and that outsiders may be joined to section 994 proceedings. As Mr Shaw submitted, I am bound by the decision in the Court of Appeal in Clark v Cutland [2004] 1 WLR 783. In that case there was both a derivative action and an unfair prejudice petition then under section 459 of the 1985 Act. The proceedings are described in the report as having been consolidated but may in fact have been tried together. The substantive relief was given in the unfair prejudice petition. Both at first instance and at the Court of Appeal the width of the jurisdiction or relief available in an unfair prejudice petition was extended to orders against third parties which could have been granted in a derivative action.
39. Mr Pay for the Claimant did not dispute the breadth of the unfair prejudice petition jurisdiction. His challenge was as to the appropriateness of it, at least in this case if not generally.
40. Standing back from the various proceedings, the allegations that are made are obviously best suited and most appropriately advanced in a derivative action. It is obvious from Clark v Cutland that both a derivative action and an unfair prejudice petition may run alongside one another in proceedings. The fact that there are already other proceedings on foot, including at least one in which a derivative claim against outsiders could be brought, is not a sufficient reason of itself for refusing at the section 263(2) gateway permission stage permission to continue the derivative claim. In my judgment, this is not a case for section 263(2) mandatory refusal. Accordingly, I proceed to the considerations under subsection 263(3).
41. The first consideration is whether the Claimant member is acting in good faith. Mr Shaw submits that the Claimant is not; rather, that the Claimant, through Mr Mawji, has a collateral purpose, namely enabling Mr Mawji to recover the Yalla Yalla restaurant business. That may well be a factor in Mr Mawji's and the Claimant's motivation. It would be surprising if that were not so. But there is also the genuine motive of restoring the company to its former position as, on the Claimant's case, a going concern with a well-established and viable restaurant business. That more than suffices for good faith.
42. Next is the importance that a person acting in accordance with section 172, duty to promote the success of the company, would attach to continuing the claim. Such a person would, in my view, and in the circumstances as they presently appear, attach considerable, if not great, importance to continuing the claim.
43. As to the factors at section 263(3)(c), (d) and (e), (c) is not this case, (d) cannot arise because the shareholders are deadlocked, and ditto for (e).
44. Section 263(3)(f) raises again as a consideration in the exercise of the court's discretion whether the member could pursue the claim in his own right rather than on behalf of the company. My view on this point is, as before, that although the Claimant could introduce a derivative claim and pursue the fifth to ninth defendants in the section 994 proceedings, the logical and most appropriate course is by a derivative claim. Quite apart from the logic of the point of view of the Claimant, it also seems to me to be the most appropriate and fairest course for the defendants who are not yet parties, that is the fifth, sixth and seventh defendants, and, further, to not materially disadvantage the defendants who are already being sued, that is the first to fourth and the eighth and ninth defendants.
45. Section 263(4) requires regard to be had to the views of members having no direct or indirect personal interests in the proceedings. There are none. In this context Mr Shaw submitted that Agushia was an insolvent, or possibly insolvent, company and, therefore, regard should be had to the views of creditors. The eighth and ninth defendants have canvassed the views of the unsecured creditors. At first canvassing, two were opposed to the proceedings and one, a creditor for £148,000, was the sole respondent to the second canvassing and confirmed its opposition and is plainly frustrated at being kept out of money due. That creditor said that it is time to collect some of the money owing.
46. If the derivative action is not pursued, the action against the administrators will continue and the section 994 proceedings may well be expanded. On any basis, whether or not section 994 proceedings are expanded, it will be some time before the administrators are in a position to distribute to creditors. The continuation of a derivative claim will not extend this time materially, at least not from this period onwards.
47. In my judgment, the Claimant should be given, and is to be given, permission to continue the derivative claim against the first to ninth defendants on behalf of itself and the other members of Agushia Limited. The Claimant has set out a case in unlawful means conspiracy which is realistic and carries conviction. It is certainly more than a prima facie case and a derivative action is the proper and, in the circumstances, appropriate process for pursuing the claim. As made clear in the course of my judgment, the Claimant did not press its indemnity application, and I shall make an order which preserves as much as possible of the cash presently available to the eighth and ninth defendants in the administration, the £190,000-odd and any further cash that may flow into the estate. I shall also make an order which enables any sums to be drawn by the eighth and ninth defendants to be reviewed by the Claimant before payment.
48. That is my judgment.