BUSINESS AND PROPERTY COURTS IN LEEDS
INSOLVENCY AND COMPANIES LIST (ChD)
1 Oxford Row, Leeds LS1 3BY
B e f o r e :
(SITTING AS A JUDGE OF THE CHANCERY DIVISION)
| WILTON UK LIMITED (SUING ON BEHALF OF ITSELF AS SHAREHOLDER IN BANKS MOUNT OSWALD LIMITED, THE FIFTH DEFENDANT)
|- and -
|JOHN MICHAEL SHUTTLEWORTH
HARRY JAMES BANKS
THE BANKS GROUP LIMITED
BANKS MOUNT OSWALD LIMITED
Mr James Ayliffe QC (instructed by Ward Hadaway) for the 1st-4th Defendants
The 5th Defendant was not represented and did not appear
Hearing dates: 23-24 January 2018
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His Honour Judge Davis-White QC :
i) Whether permission to continue company derivative proceedings should now be given pursuant to s263 Companies Act 2006 ("CA 2006");
ii) Whether retrospective permission should be granted to begin the proceedings, thereby validating certain procedural steps that have been taken in the proceedings without permission of the court, namely service of the proceedings and service of particulars of claim.
5.1 an application by the claimant dated 9 November 2016, issued at the same time as the claim form, asking the court for permission to continue the proceedings, and for an extension of 6 weeks from its date for service of the particulars of claim. This application was, at the claimant's request, not initially listed for a hearing and only became so more recently;
5.2 an application by the defendants dated 3 April 2017 seeking a declaration that the court has no jurisdiction to try the current Part 7 claim and setting aside service of both the claim form and particulars of claim; and
5.3 a further application of the claimant dated 23 June 2017 seeking interim permission to continue the claim up and until determination on an inter-parties basis of its applications dated 9 November 2016 and 23 June 2017, and an order that the claim form and particulars of claim are deemed served on 8 March 2017.
The Part 7 Derivative Claim
" in consideration of TC and DW introducing the opportunity to develop the site to Banks, Banks TC and DW would be joint venturers in the development of the Site and would share the profits, after costs and interest on costs, on a 50:50 basis".
Derivative claim proceedings: the chronology
The Direct Claim
(1) Contract 1 is said to have been reached between BGL (alternatively such other Banks company of defendants 1 to 5 as the Court might conclude) and TC and DW.
(2) The first claim is for damages for breach of Contract 1, which breach has said to have been accepted and the contract terminated. The loss and damage is said to be the value of payments that should have been made to them under Contract 1 and/or the increase in the value of their shares in WHL, had the development and exploitation of the Site taken place through the medium of BMO.
(3) The second, alternative, claim is that if the obligation under Contract 1 to share profits with TC and DW was discharged in whole or part by the JV documentation entered into in August 2008 then BPL, in breach of the shareholders agreement, has failed to maintain and extend the business of BMO, to further its interests or to do all things reasonably necessary to give effect to the spirit and intendment of the shareholders' agreement. The loss and damage is said to be the diminution in value of Wilton's shareholding in BMO.
(4) The third claim is in conspiracy against Mr Banks, Mr Shuttleworth and BPL, the conspiracy being an unlawful means conspiracy to harm the claimants. The unlawful means are said to be the misuse of the confidential information and the breaches of the Shareholders' Agreement and/or Contract 1.
(5) The fourth claim, is against Mr Banks for inducing breach of contract (being Contract 1);
(6) The fifth claim is that Mr Banks induced BPL to breach the shareholders' agreement, thereby causing loss to Wilton.
(7) The sixth claim, in the event that Contract 1 was not a binding contract, is one in mistake (that TC and DW provided valuable services to BGL in the mistaken belief that Contract 1 was binding) and that they are entitled to a quantum meruit for such services.
The statutory regime and the CPR
260. Derivative claims
(1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—
(a) in respect of a cause of action vested in the company, and
(b) seeking relief on behalf of the company.
This is referred to in this Chapter as a "derivative claim".
(2) A derivative claim may only be brought—
(a) under this Chapter, or
(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).
(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both).
(4) It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.
(5) For the purposes of this Chapter—
(a) "director" includes a former director;
(b) a shadow director is treated as a director; and
(c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.
261 Application for permission to continue derivative claim
(1) A member of a company who brings a derivative claim under this Chapter must apply to the court for permission (in Northern Ireland, leave) to continue it.
(2) If it appears to the court that the application and the evidence filed by the applicant in support of it do not disclose a prima facie case for giving permission (or leave), the court—
(a) must dismiss the application, and
(b) may make any consequential order it considers appropriate.
(3) If the application is not dismissed under subsection (2), the court—
(a) may give directions as to the evidence to be provided by the company, and
(b) may adjourn the proceedings to enable the evidence to be obtained.
(4) On hearing the application, the court may—
(a) give permission (or leave) to continue the claim on such terms as it thinks fit,
(b) refuse permission (or leave) and dismiss the claim, or
(c) adjourn the proceedings on the application and give such directions as it thinks fit.
263 Whether permission to be given
(1) The following provisions have effect where a member of a company applies for permission (in Northern Ireland, leave) under section 261….
(2) Permission (or leave) 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
(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 (or leave) 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 (or leave) 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.
"Derivative claims – how started
(1) This rule –
(a) applies to a derivative claim (where a company is alleged to be entitled to claim a remedy, and a claim is made by a member of it for it to be given that remedy), …under Chapter 1 of Part 11 of the Companies Act 2006….
(2) A derivative claim must be started by a claim form.
(3) The company, ….for the benefit of which a remedy is sought must be made a defendant to the claim.
(4) After the issue of the claim form, the claimant must not take any further step in the proceedings without the permission of the court, other than –
(a) a step permitted or required by rule 19.9A or 19.9C; or
(b) making an urgent application for interim relief.
Derivative claims under Chapter 1 of Part 11 of the Companies Act 2006 – application for permission
(1) In this rule –
'the Act' means the Companies Act 2006;
'derivative claim' means a derivative claim under Chapter 1 of Part 11 of the Act;
'permission application' means an application referred to in section 261(1), 262(2) or 264(2) of the Act;
'the company' means the company for the benefit of which the derivative claim is brought.
(2) When the claim form for a derivative claim is issued, the claimant must file –
(a) an application notice under Part 23 for permission to continue the claim; and
(b) the written evidence on which the claimant relies in support of the permission application.
(3) The claimant must not make the company a respondent to the permission application.
(4) Subject to paragraph (7), the claimant must notify the company of the claim and permission application by sending to the company as soon as reasonably practicable after the claim form is issued –
(a) a notice in the form set out in Practice Direction 19C, and to which is attached a copy of the provisions of the Act required by that form;
(b) copies of the claim form and the particulars of claim;
(c) the application notice; and
(d) a copy of the evidence filed by the claimant in support of the permission application.
(5) The claimant may send the notice and documents required by paragraph (4) to the company by any method permitted by Part 6 as if the notice and documents were being served on the company.
(6) The claimant must file a witness statement confirming that the claimant has notified the company in accordance with paragraph (4).
(7) Where notifying the company of the permission application would be likely to frustrate some party of the remedy sought, the court may, on application by the claimant, order that the company need not be notified for such period after the issue of the claim form as the court directs.
(8) An application under paragraph (7) may be made without notice.
(9) Where the court dismisses the claimant's permission application without a hearing, the court will notify the claimant and (unless the court orders otherwise) the company of that decision.
(10) The claimant may ask for an oral hearing to reconsider the decision to dismiss the permission application, but the claimant –
(a) must make the request to the court in writing within seven days of being notified of the decision; and
(b) must notify the company in writing, as soon as reasonably practicable, of that request unless the court orders otherwise.
(11) Where the court dismisses the permission application at a hearing pursuant to paragraph (10), it will notify the claimant and the company of its decision.
(12) Where the court does not dismiss the application under section 261(2) of the Act, the court will –
(a) order that the company and any other appropriate party must be made respondents to the permission application; and
(b) give directions for the service on the company and any other appropriate party of the application notice and the claim form.
."Early intervention by the company
5 The decision whether the claimant's evidence discloses a prima facie case will normally be made without submissions from or (in the case of an oral hearing to reconsider such a decision reached pursuant to rule 19.9A(9)) attendance by the company. If without invitation from the court the company volunteers a submission or attendance, the company will not normally be allowed any costs of that submission or attendance.
(Sections 261, 262 and 264 of the Companies Act 2006 contain provisions about disclosing a prima facie case in applications to continue a derivative claim.)
Hearing of applications etc.
Prospective Permission: the test
(1) That a person acting in accordance with s172 CA 2006 would not seek to continue the claim (s263(2)(a)). (As regards this, the test is that I must be satisfied that no director, acting in accordance with s172 CA 2006 would seek to continue the claim. If some directors might and others would not, seek to continue the claim then I should not refuse permission under this provision (Iesini v Westrip Holdings Limited  EWHC 2526,  1 BCLC at ,  but go on to consider the importance that a director would attach to continuing the claim under s263(3)(b))); or
(2) The cause of action arises from an act or omission that was authorised by the Company before it occurred or subsequently ratified by the Company (s263(2)(c)). If not so satisfied, then I have to consider the wide range of matters set out in s263(3).
(1) whether the member is acting in good faith in seeking to continue the claim (s263(3)(a));
(2) the importance that a person acting in accordance with s172 CA 2006 would attach to continuing it (s263(3)(b));
(3) whether the relevant act or omission could be or is likely to be ratified by the Company (s263(3)(d));
(4) whether the Company has decided not to pursue the claim (s263(3)(e));
(5) whether the relevant act or omission gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the Company.
(1) In relation to the acquisition of Option 2, the decision was agreed to by TC and DW and Wilton.
(2) The Derivative Claim lacks merit;
(3) The claimant has an alternative remedy, namely pursuit of the Direct Claim;
(4) Costs considerations militate against leave;
(5) There is at present no decision by BMO as to whether or not to pursue the derivative action.
(1) Agreement to BMO acquiring Option 2
(2) Lack of legal merit
(3) Alternative remedy
(16) in the absence of argument on the point, [the administrator, Mr Sainter] left out of account the question whether Mr Sainter as administrator might be liable to pay the costs if a derivative action were permitted and proceeded and failed;
(17) Mark Roberts had legal services funding to bring the present proceedings and it might very well be the case that he had or would obtain legal services funding to bring a derivative claim;
(18) the court had power under CPR r 17.4 to give Mark Roberts permission to amend the present proceedings to add a derivative claim (if special circumstances existed) and thereby defeat a limitation defence.
He went on:
`" The judge took the view that, although the list of "special circumstances" was not closed and "special circumstances" had never been exhaustively defined, the circumstances as to legal services funding and limitation were of a different character from anything contemplated in the cases as to special circumstances. The circumstances in (17) and (18) were not special circumstances which would justify the court in permitting Mark Roberts to bring a derivative claim against the defendants. Arden LJ (with whom Patten J agreed) seems to have taken the view that the judge was wrong (among other reasons) because he had not given sufficient weight to the fact that the derivative claim would enable an asset to be realised, which otherwise could not be realised, and because Mark Roberts had legal aid the estate would not have to fund his costs."
" In Bradstock Trustee Services Ltd v Nabarro Nathanson  1 WLR 1405 the plaintiffs were trustees of an occupational pension scheme which had started proceedings to recover a sum thought to represent surplus which had been repaid to the employer. They brought proceedings for professional negligence against the solicitors who had advised on the matter. However, they were informed that the costs of both sides might exceed the total assets of the scheme and that they were personally at risk as to costs. They obtained directions from the court allowing willing beneficiaries to be substituted as plaintiffs. These beneficiaries obtained legal aid to take over the proceedings. They then applied to the court to be substituted as plaintiffs. Judge Paul Baker QC, sitting as a judge of the Chancery Division, dismissed the application…."
"I conclude, therefore, …that the applicants cannot be substituted as plaintiffs to continue the action against the defendants for the following reasons. (a) The applicants have no property, legal or equitable, in the subject matter of the action. The trustees and no one else have a cause of action against the defendants. This is not a case where the defendants are alleged to have wrongly received, retained or paid away the trust property or part of it. (b) In all probability, it will not protect the trust against the risk of being resorted to for the defendants' costs if the action fails, which is what prompted the application in the first place."
"In my judgment, the conduct of the trustees does not amount to a failure by them in the performance of their duty to protect the trust estate. It is true that they are unwilling to incur personal liability, but, before that point is reached, the entire trust fund as presently constituted would have been exhausted in indemnifying the trustees. They can reasonably take the view that they should not put the fund to that risk, a view apparently shared by Walker J., in that he withdrew their liberty to prosecute the action further if this application fails."
"…the beneficiaries suing in a derivative action are entitled to obtain their costs out of the assets of the company or the pension fund, as the case may be. That will comprise both their own costs and any that they may be ordered to pay. It is true that in the case of legally aided plaintiffs any costs order against them will, in all probability, not be enforceable. Yet that would appear not to preclude an order being made against the trustees, who remain parties to the action, in favour of the present defendants if they succeed in their defence. Accordingly, I accept Mr. Steinfeld's submission that, in so far as the present application is designed to protect the fund and the trustees from the effects of an adverse costs order, it is unlikely to be successful."
" The court must naturally consider the financial impact of the bringing of the proceedings on the estate or trust. As Goff J held in In re Field  1 WLR 555, the fact that the personal representative is unwilling to sue is not in itself enough. However, in very many cases, the fact that the derivative claim will enable an asset that could not otherwise be realised to be realised will be a very powerful consideration, subject, however, to bringing into account the risk to the estate involved in bringing the action. In the present case, the claimant has legal aid and thus the estate will not have to fund his costs. There is no suggestion of a counterclaim. The only claim is for the recovery of damages. If that were to be successful, the estate's assets would be increased. But the estate would also have a contingent liability for the costs of the solicitors. In the present case there are no assets out of which those costs could be paid"
As I have said, the financial impact referred to by Arden LJ is, in the corporate derivative claim sphere, now taken account of at various stages in the exercise that the Court must engage in, as laid down by the CA 2006 and as reflected in the submissions of the defendants.
 In Bradstock Trustee Services Ltd v Nabarro Nathanson  1 WLR 1405, referred to at para 19 above, Judge Paul Baker QC left open the question whether permission to bring a derivative claim should be brought in these circumstances. No doubt the reason for his concern was that, if the court gave permission for a claim, it was likely that the defendants, if successful, would not recover their costs. This is a most unsatisfactory state of affairs, but it must often be the case that defendants are faced with a claimant who has the benefit of public funding for his costs. If there were other persons who could bring the claim who were not publicly funded, I would expect the court to consider refusing permission. Subject to that, in my judgment, a publicly-funded claimant should be able to bring a derivative claim. The fact that the estate has no assets means that it is not at risk if a derivative claim is brought.
 I proceed, therefore, on the basis that it is no objection in this case that the claimant has the benefit of costs protection as a publicly-funded litigant. On this basis, the next question is whether, if there had been no limitation objection as I have concluded above, the claimant would have been able to show that there were special circumstances justifying the grant of permission to amend to bring a derivative claim
(5) No decision by BMO regarding the proceedings
Application of test under s263
Retrospective permission: the principles
Retrospective Permission: the facts
i) To refuse permission retrospectively (and therefore prospectively) and to leave the claimant to bring fresh proceedings so that the limitation point is then determined by the court and, if any claims are barred by limitation for the claimant to be bound accordingly;
ii) To give retrospective permission as regards those claims where it is clear that limitation does not bar the claim but to refuse permission where it is arguable that they are bound;
iii) To give retrospective permission.
I return to consider this issue when applying the Denton/Mitchell principles.
Application of the Denton/Mitchell principles
(1) The seriousness and significance of the breach;
(2) The reasons why the default occurred;
(3) All the circumstances of the case (including those set out in CPR r3.9(1)(a) and (b)).