High Court of Ireland Decisions

Judgment Title: Fanning v Murtagh & Ors

Neutral Citation: [2008] IEHC 277


High Court Record Number: 2008 30 IA

Date of Delivery: 30 July 2008

Court: High Court

(1) A declaration that a severance agreement entered into with the fourth named defendant on 8th September, 2006, whereby the plaintiff stepped down as C.E.O. of the company, was procured by undue influence and/or misrepresentation on the part of the first and/or fourth named defendants;

(2) A declaration that a deed of irrevocable proxy signed by the plaintiff in favour of a resolution to approve of the Business Purchase Agreement was procured in like fashion by the first and fourth named defendants;

(3) Damages for breach of contract against the fourth named defendant;

(4) A declaration that the plaintiff is entitled an indemnity from the first named defendant in respect of borrowings of some €5m from Anglo Irish Bank; and

(5) Other ancillary relief.

It is a fundamental principle of our law that a company is a legal person, with its own corporate identity, separate and distinct from the directors or shareholders, and with its own property rights and interests to which alone it is entitled. If it is defrauded by a wrongdoer, the company itself is the one person to sue for the damage. Such is the rule in Foss v. Harbottle (1843) 2 Hare 461.

The rule is easy enough to apply when the company is defrauded by outsiders. The company itself is the only person who can sue. Likewise, when it is defrauded by insiders of a minor kind, once again the company is the only person who can sue. But suppose it is defrauded by insiders who control its affairs – by directors who hold a majority of the shares - who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise the proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress.”

“1. The proper plaintiff is prima facie the company.

“The nature of the derivative action is that it is a ‘procedural device for enabling the court to do justice to a company controlled by miscreant Directors or shareholders.’ It follows that the court is entitled to examine the conduct of whoever intends to start such proceedings – the person must be doing so for the benefit of the company and not for some other purpose; i.e. he or she must be a proper person to bring a derivative action. A particular person might not be a proper person because his or her conduct is tainted in some way which under the rules of equity may bar relief; e.g. he or she might not come with ‘clean hands’ (e.g. having participated in the wrong), or have been guilty of delay, or be motivated by purely personal motives which are not bona fide for the benefit of the company… There is therefore no right to bring a derivative action, the court has a discretion whether to allow an action to be brought. Thus an action has been dismissed where there was another viable remedy, and where an independent group of shareholders were opposed to the action.”

“(ix) The courts should not shrink from determining whether the justice of the case should allow a shareholder to proceed with a derivative action. Equity is concerned with substance and not form, and it was contrary to principle to require round minority shareholders to bring themselves within the boundaries of well recognised exceptions and to deny jurisdiction even where an unjust or unconscionable result may otherwise ensue. It was desirable to allow a minority shareholder to bring a derivative claim where the justice of the case clearly demanded that such a claim be brought, irrespective of whether the claim falls within the confines.”

“While the view was advanced in earlier editions of this book that the Irish courts might be reluctant to extend the exceptions to the rule, that is probably to err on the side of caution. While it is true that the wide import of the term ‘fraud’ enables most deserving cases to avail of the third exception where the other two are not available, there is probably no good reason why the courts should not carve out further exceptions if justice so requires. Not only should the judicial comments in support of that view already cited be borne in mind; it is also worth noting that in the two seminal cases of Foss v. Harbottle itself and Edwards v. Halliwell, Wigram V-C and Jenkins LJ both observed that the rule should not be applied in so rigorous a fashion in any case as to lead to injustice.”

“I respectfully agree that the formulation of the rule in the earlier cases makes clear that it [the rule in Foss v. Harbottle] should not be applied in such a way as to lead to injustice. Nevertheless, the entitlement of a shareholder to pursue by way of derivative action a claim for and on behalf of a company is an exception to an ‘elementary principle’... As such it should not be broadly or liberally applied. A very strong case would have to be made out. It would also have to be consistent with the principles underlying the rule in Foss v. Harbottle and the exceptions to it. These include the reluctance of the courts to interfere in the internal management of a company.”

“Now that the principle is recognised, it has important consequences which have hitherto not been perceived. The first is that the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonably incurred by him in the course of the agency. This indemnity does not arise out of a contract express or implied, but it arises on the plainest principles of equity. It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris: see Hardoon v. Belilios [1901] AC 118 and In re Richardson, Ex parte Governors of St. Thomas’s Hospital [1911] 2 KB 705. Seeing that, if the action succeeds, the whole benefit will go to the company, it is only just that the minority shareholder should be indemnified against the costs he incurs on its behalf. If the action succeeds, the wrongdoing director will be ordered to pay the costs: but if they are not recovered from him they should be paid by the company… But what if the action fails? Assuming that the minority shareholder had reasonable grounds for bringing the action – that it was a reasonable and prudent course to take in the interest of the company - he should not himself be liable to pay the costs of the other side, but the company itself should be liable, because he was acting for it and not for himself. In addition, he should himself be indemnified by the company in respect of his own costs even if the action fails. It is a well known maxim of the law that he who would take the benefit of a venture if it succeeds ought also to bear the burden if it fails. Qui sentit commodum sentire debet et onus. This indemnity should extend to his own costs taxed on a common fund basis.

In order to be entitled to this indemnity, the minority shareholder soon after issuing should apply for the sanction of the court in somewhat the same way as a trustee does: see In re Beddoe, Downes v. Cottam [1893] 1 Ch 547, 557 – 558. In a derivative action, I would suggest this procedure: the minority shareholder should apply ex parte to the master for directions, supported by an opinion of counsel as to whether there is a reasonable case or not. The master may then, if he thinks fit, straight away approve the continuance of the proceedings until close of pleadings, or until after discovery or until trial (rather as a legal aid committee does). The master need not, however, decide it ex parte. He can, if he thinks fit, require notice to be given to one or two of the other minority shareholders - as representatives of the rest – so as to see if there is any reasonable objection. (In this very case another minority shareholder took this very point in letters to us.) But this preliminary application should be simple and inexpensive. It should not be allowed to escalate into a minor trial. The master should simply ask himself: is there a reasonable case for the minority shareholder to bring at the expense (eventually) of the company? If there is, let it go ahead.”

“Counsel for the plaintiffs also sought an order that the fourth and fifth named defendants (‘the Companies’) indemnify the plaintiffs against the orders for costs made against them in these proceedings. He does so in reliance upon the approach taken by Lord Denning the (sic) Court of Appeal in Wallersteiner v. Moir (No. 2) [1975] 2 W.L.R. 389.”

“I would respectfully agree with the principles as stated by Lord Denning, including the possibility of a minority shareholder in certain circumstances obtaining an indemnity against a company for the costs of bringing a derivative action which fails. However, as pointed out by Lord Denning, such an order would only be made where the minority shareholder had reasonable grounds for bringing the action ‘that it was a reasonable and prudent course to take in the interests of the company’ and probably only where a filter procedure such as envisaged in the final paragraph referred to above had taken place at an earlier stage in the proceedings.”

“On the facts of these proceedings it does not appear to me that the plaintiffs are entitled to an indemnity. The plaintiffs did not seek any order entitling them to proceed by way of derivative claim. In the absence of rules in this jurisdiction they might not be criticised for so failing.”

19.9 - (1) This rule applies where a company, other incorporated body or trade union is alleged to be entitled to claim a remedy and a claim is made by one or more members of the company, body or trade union for it to be given that remedy (a ‘derivative claim’).

(2) The company, body or trade union for whose benefit a remedy is sought must be a defendant to the claim.

(3) After the claim has been issued the claimant must apply to the court for permission to continue the claim and may not take any other step in the proceedings except –
(a) as provide by paragraph (5); or

(b) where the court gives permission.
(4) An application in accordance with paragraph (3) must be supported by written evidence.

(a) claim form;

(b) application notice; and
(c) written evidence in support of the application

must be served on the defendant within the period within which the claim form must be served and, in any event, at least 14 days before the court has to deal with the application.
(6) If the court gives the claimant permission to continue the claim, the time within which the defence must be filed is 14 days after the date in which the permission is given or such period as the courts may specify.

(7) The court may order the company, body or trade union to indemnify the claimant against any liability in respect of costs incurred in the claim.”

“no good reason why in derivative actions of the nature under discussion the court should depart from its customary approach of permitting the action to proceed on the assumption that the plaintiff had not alleged such conduct in the pleadings without at least being in a position to present an arguable case. The plaintiff, after all, is the person who is likely to suffer in costs if the plea is unsustainable.”

“…a broad spectrum extending from an overall absolute majority of votes at one end, to a majority of votes at the other end made up of those likely to be cast by the delinquent himself plus those voting with him as a result of influence or apathy.”

“It should be noted that at the Extraordinary General Meeting of shareholders held on the 31st October, 2006, the resolution authorising the sales of the Company’s assets and liabilities was passed by an overwhelming majority of the members in the following circumstances. I as chairman of the meeting held 186,520,457 proxies in favour plus an additional 15,737,590 proxies in favour which were held at my discretion. An additional 49,431 proxies in favour were held by other holders. 5,532,543 proxies held by 28 persons were against the motion. The petitioner’s proxies represented less that 10% of the majority vote.”

(iii) Approbation of the Alleged Wrongdoing by Execution of a Proxy in Favour of the Transaction