EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Nimmo Smith Lord Reed Sir David Edward, QC	[2009 CSIH 65] P385/08 OPINION OF THE COURT delivered by LORD REED in Reclaiming Motion in the Petition of ALEXANDER MARSHALL WISHART Petitioner; against CASTLECROFT SECURITIES LTD and OTHERS Respondents: _______

Act: Johnston, QC, Barne; Tods Murray LLP

Alt: Ellis, QC, Motion, solicitor advocate; bto

21 July 2009

Introduction

[1] These proceedings concern an application by the petitioner under section 266 of the Companies Act 2006 for leave to raise derivative proceedings on behalf of the first respondents, Castlecroft Securities Ltd ("the Company"), against the second and third respondents, John Black and SJB Developments Ltd ("SJB"). The application was granted by the Lord Ordinary on terms which we shall explain. Before this court, the respondents have challenged the approach adopted by the Lord Ordinary in deciding whether the application ought to be granted, and also the terms on which the Lord Ordinary decided that it should be granted. This is the first occasion on which the relevant provisions of the 2006 Act have been considered by this court.

The background to the relevant legislation

[2] Scots law has long recognised that derivative actions (i.e. shareholder actions in which the member seeks to enforce a cause of action vested in the company) are competent under the common law in certain circumstances, such as where those in control of the company are alleged to have committed wrongs against it. The relevant Scottish authorities were discussed in two recent decisions of the Outer House: Anderson v Hogg 2000 SLT 634 (and, on appeal, 2002 SC 190) and Wilson v Inverness Retail and Business Park Ltd 2003 SLT 301. The law in Scotland achieved a similar practical result, in broad terms, to that in England and Wales and Northern Ireland, although there were differences in procedure. In particular, it was unnecessary under Scots law for the member to obtain the leave of the court in respect of such proceedings. If, however, his entitlement to bring the proceedings were challenged by the defenders, the court would determine that question in the course of the proceedings. In England and Wales, on the other hand, a claimant who had brought a derivative claim was required under the Civil Procedure Rules to apply to the court at an initial stage for permission to continue the proceedings.

[3] The law in England and Wales was reviewed by the Law Commission, which made recommendations in its report on Shareholder Remedies (LC 246, 1997). Appendix D to the report contained a review of the relevant Scots law by the Scottish Law Commission, with recommendations which, it said, were aimed at achieving "the same practical result" (paragraph 4). The recommendations of the Law Commission formed the basis of Chapter 1 of Part 11 of the 2006 Act, which set out a new legislative framework for derivative claims in England and Wales and Northern Ireland. The recommendations of the Scottish Law Commission (which largely followed the approach recommended by the Law Commission for England and Wales) formed the basis of Chapter 2 of Part 11 of the Act, which replaced the common law with a statutory basis for derivative proceedings, and introduced into Scots law the requirement that such proceedings may be raised only with the leave of the court. Although Part 11 of the Act was, as we have said, based on the recommendations of the two Commissions, it is relevant to note that the legislation departed from those recommendations in some significant respects.

[4] It is convenient to note at this stage some of the matters discussed in the report. The Law Commission identified as one of the principal problems affecting shareholder remedies in England and Wales the "obscurity and complexity" of the law relating to derivative actions. The law relating to the circumstances in which such proceedings could be brought - the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461 - was described as "rigid, old fashioned and unclear", and "inaccessible save to lawyers specialising in this field because, to obtain a proper understanding of it, it is necessary to examine numerous reported cases decided over a period of 150 years" (paragraph 1.4). The Commission also noted that "the procedure is lengthy and costly, involving a preliminary stage which in one case [Smith v Croft (No 2) [1988] Ch 114] took 18 days of court time to resolve" (ibid). The Commission "expressed concern at the way in which a member was required to prove standing to bring an action as a preliminary issue by evidence which shows a prima facie case on the merits, and noted that this could easily result in a mini trial which increased the length and cost of litigation" (paragraph 6.4).

The Commission accordingly recommended that there should be a new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder can pursue the action (paragraph 6.15).

[5] The Commission considered first the availability of the new derivative action: in other words, who should be able to bring a derivative action; whether it should only be available in respect of breach of duty by directors (including claims against third parties as a result of such breach); whether it should extend to negligence by directors; and whether it should also be available for breaches of duty by officers and employees (paragraphs 6.33ff). The Commission then considered the procedure. They recommended that, in England and Wales, the court should normally consider the matter of leave at the case management conference held in the derivative action, at which all parties would be present (paragraph 6.67): as we shall explain, that recommendation was not implemented. The Commission next considered issues relevant to the grant of leave. They were of the view that in considering the issue of leave the court should take into account all the relevant circumstances without limit. Six specific matters were however identified which the court should take into account: the applicant's good faith; the interests of the company; that the wrong had been, or might be, approved in general meeting; that the company in general meeting had resolved not to pursue the cause of action; the views of an independent organ; and the availability of alternative remedies (paragraphs 6.70ff). The Commission specifically rejected the idea of a threshold test on the merits of the derivative claim, stating (at paragraphs 6.71-6.72):

"Our provisional view was that there should be no threshold test on the merits of the case. Our main reason for this was that the inclusion of an express test would increase the risk of a detailed investigation into the merits of the case taking place at the leave stage, and that such a 'mini-trial' would be time consuming and expensive. There would of course be some consideration of the merits, since it would clearly be wrong for the court to allow an obviously hopeless case to proceed. But we considered that it would be undesirable to encourage the parties to bring evidence to show that the case met or failed to meet a particular merits test.

Most respondents who considered this issue agreed with this approach and we remain of the view that there should be no threshold test. We consider that including a specific threshold test would lead to fine distinctions being drawn as to whether the facts of individual cases fall on one or other side of a particular line drawn and we consider that this is undesirable. We consider that it is preferable for the courts to develop a principled approach which is not tied to the rigid language of a particular rule or statutory provision. Accordingly, we recommend that there should be no threshold test on the merits."

In relation to costs, the Commission recommended that the court's power to make costs indemnity orders in derivative actions (as established in Wallersteiner v Moir (No 2) [1975] QB 373) should remain unchanged (paragraph 6.104). Generally, the Commission's recommendations were intended to achieve a balance between facilitating the bringing of derivative actions, where the rule in Foss v Harbottle and its exceptions were seen to create undue difficulty, and protecting companies from too ready and unwarranted interference in their internal management.

[6] The Scottish Law Commission took as their starting point a policy "to achieve, so far as possible and reasonable, consistency in substantive company law throughout the United Kingdom" (paragraph 4). They considered that the existing Scots law was unclear, and that the circumstances in which an action could be brought by a shareholder to obtain a remedy on behalf of the company should be put on a clear statutory basis. They followed the structure of the discussion by the (English) Commission, considering in turn the availability of the remedy, the procedure and the relevant criteria. In relation to the procedure, they recommended that there should be a requirement for the granting of leave to bring derivative proceedings (paragraph 46). In relation to the relevant criteria, they agreed with the (English) Commission's view that it would be unsatisfactory to require the court to apply fixed or definitive criteria for the granting of leave, stating that it was essential that the court had flexibility to look at all of the relevant circumstances. They recommended that the court should take account of all the relevant circumstances, and in particular the six specific matters identified by the (English) Commission (paragraph 50). In relation to expenses, the Scottish Law Commission recommended that the court should have power to grant an application by the member for an indemnity out of the company's assets in respect of expenses incurred or to be incurred by the member in relation to the derivative action, and that this should not be confined to judicial expenses, but should be able to extend to all expenses incurred. In that regard, the Commission stated (at paragraph 71):

"Under Scots law, the court does not have a common law power to make an award of expenses against a person who is not a party to the cause unless he is the dominus litis or legal representative of the party. The basis on which the action may be raised, and its purpose, is to protect the interests of the company and to obtain a remedy for the company. In our view, therefore, it is only right that the court should have power to grant an application by the shareholder for an indemnity out of the company's assets in respect of expenses incurred, or to be incurred, by him in relation to the action. This should not be confined to judicial expenses. The court should be able to make an award covering any and all expenses."

The relevant legislation

[7] Sections 260 to 264 of the 2006 Act set out the legislative framework for derivative claims in England and Wales and Northern Ireland. They define the circumstances in which a derivative claim is available, establish a procedure whereby the claimant who brings a derivative claim must apply to the court for permission to continue it, and set out criteria to guide the court on whether to grant permission. In relation to procedure, in particular, section 261(1) provides that "a member of a company who brings a derivative claim ... must apply to the court for permission ... to continue it". That provision can be contrasted with the corresponding provision for Scotland, in section 266(1), that "derivative proceedings may be raised by a member of a company only with the leave of the court". The English provisions are otherwise similar to the Scottish provisions, which are set out in sections 265 to 269.

[8] Section 265 defines the circumstances in which derivative proceedings are available in Scotland. It provides:

"265 Derivative proceedings

(1) In Scotland, a member of a company may raise proceedings in respect

of an act or omission specified in subsection (3) in order to protect the interests of the company and obtain a remedy on its behalf.

(2) A member of a company may raise such proceedings only under

subsection (1).

(3) The act or omission referred to in subsection (1) is any actual or

proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.

(4) Proceedings may be raised under subsection (1) against (either or both) -

(a) the director referred to in subsection (3), or

(b) another person.

...

(6) This section does not affect-

...

(b) the court's power to make an order under section 996(2)(c) or anything done under such an order.

(7) In this Chapter -

(a) proceedings raised under subsection (1) are referred to as

'derivative proceedings',

(b) the act or omission in respect of which they are raised is

referred to as the 'cause of action' ... "

The effect of section 265(2) is that derivative proceedings can only be brought on the basis of the statutory provisions, and not under the common law. The effect of section 265(3) is that the proceedings must be in respect of an act or omission (actual or proposed) involving the breach by a director of a duty which he owes to the company. The effect of section 265(4) is that the proceedings can be brought against both (or either of) the director and a third party. Since the proceedings are brought "in order to protect the interests of the company and obtain a remedy on its behalf" (section 265(1)), they can only be brought against a third party where the company would itself be entitled to bring proceedings against the third party; and the proceedings against the third party must be in respect of an act or omission involving the director's breach or threatened breach of duty. Section 265(6)(b) makes it clear that the section does not affect the court's power under Part 30 of the Act (which is concerned with the protection of members against unfair prejudice, and replaces sections 459-461 of the Companies Act 1985) to authorise proceedings to be brought in the name and on behalf of the company.

[9] Section 266 is concerned with the procedure to be followed. It provides:

"266 Requirement for leave and notice

(1) Derivative proceedings may be raised by a member of a company only

with the leave of the court.

(2) An application for leave must-

(a) specify the cause of action, and

(b) summarise the facts on which the derivative proceedings are to

be based.

(3) If it appears to the court that the application and the evidence produced

by the applicant in support of it do not disclose a prima facie case for granting it, the court-

(a) must refuse the application, and

(b) may make any consequential order it considers appropriate.

(4) If the application is not refused under subsection (3)-

(a) the applicant must serve the application on the company,

(b) the court-

(i) may make an order requiring evidence to be produced

by the company, and

(ii) may adjourn the proceedings on the application to

enable the evidence to be obtained, and

(c) the company is entitled to take part in the further proceedings

on the application.

(5) On hearing the application, the court may-

(a) grant the application on such terms as it thinks fit,

(b) refuse the application, or

(c) adjourn the proceedings on the application and make such order

as to further procedure as it thinks fit."

Section 266(1) imposes the requirement that leave be obtained. It creates a two-stage procedure: a first stage, prior to service of the application, when the court considers the application and the evidence produced by the applicant in support of it, and must refuse the application if those materials do not disclose a prima facie case for granting it; and, if the application is not so refused, a second stage, after service, when the court considers the application at a hearing in which the company is entitled to take part. The relevant provision for England and Wales (in section 261) creates a similar two-stage procedure, although there are some technical differences which it is convenient to note at this point. Under Rule 19.9A of the Civil Procedure Rules applicable in England, the application is commenced by the issue of a claim form in respect of the derivative claim, accompanied by a separate application for permission to continue the claim. In the normal course, the application and the evidence filed in support of it are considered by the court without the company's being made a respondent. If the application is not dismissed at that stage as failing to disclose a prima facie case for granting it, the court orders that the company and any other appropriate party be made a respondent to the application, and directs service on them of the application notice and claim form. A hearing is then held on the application. In practice, the parties may agree to telescope this procedure by dealing with the application in its entirety at a single hearing (as, for example, in Mission Capital plc v Sinclair [2008] BCC 866 and Frambar Holdings Ltd v Patel [2008] BCC 885). As we have explained, the first stage in this procedure was not foreshadowed in the Law Commission report. It was introduced by amendment in the House of Lords, so as to reduce the burden imposed on companies by unmeritorious applications.

[10] Although it is not directly relevant to the present case, we also require to note the terms of section 267, which provides:

"267 Application to continue proceedings as derivative proceedings

(1) This section applies where-

(a) a company has raised proceedings, and

(b) the proceedings are in respect of an act or omission which

could be the basis for derivative proceedings.

(2) A member of the company may apply to the court to be substituted for

the company in the proceedings, and for the proceedings to continue in consequence as derivative proceedings, on the ground that-

(a) the manner in which the company commenced or continued the

proceedings amounts to an abuse of the process of the court,

(b) the company has failed to prosecute the proceedings diligently,

and

(c) it is appropriate for the member to be substituted for the

company in the proceedings.

(3) If it appears to the court that the application and the evidence produced

by the applicant in support of it do not disclose a prima facie case for granting it, the court-

(a) must refuse the application, and

(b) may make any consequential order it considers appropriate.

(4) If the application is not refused under subsection (3)-

(a) the applicant must serve the application on the company,

(b) the court-

(i) may make an order requiring evidence to be produced

by the company, and

(ii) may adjourn the proceedings on the application to

enable the evidence to be obtained, and

(c) the company is entitled to take part in the further proceedings

on the application.

(5) On hearing the application, the court may-

(a) grant the application on such terms as it thinks fit,

(b) refuse the application, or

(c) adjourn the proceedings on the application and make such order

as to further procedure as it thinks fit."

Section 267 therefore applies where the company has already commenced proceedings in respect of an act or omission which could be the basis for derivative proceedings. In such a case, the section enables a member to apply to the court to be substituted for the company in the proceedings, and for the proceedings to continue as derivative proceedings, on the ground that the manner in which the company commenced or continued the proceedings amounts to an abuse of process, the company has failed to prosecute the proceedings diligently and it is appropriate for the member to be substituted for the company in the proceedings.

[11] Section 268 is concerned with the issues relevant to the grant (or refusal) of leave. It provides:

"268 Granting of leave

(1) The court must refuse leave to raise derivative proceedings or an

application under section 267 if satisfied-

(a) that a person acting in accordance with section 172 (duty to

promote the success of the company) would not seek to raise or continue the proceedings (as the case may be), or

(b) where the cause of action is an act or omission that is yet to

occur, that the act or omission has been authorised by the company, or

(c) where the cause of action is 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.

(2) In considering whether to grant leave to raise derivative proceedings or

an application under section 267, the court must take into account, in particular-

(a) whether the member is acting in good faith in seeking to raise

or continue the proceedings (as the case may be),

(b) the importance that a person acting in accordance with section

172 (duty to promote the success of the company) would attach to raising or continuing them (as the case may be),

(c) where the cause of action is 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 is 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 raise proceedings in

respect of the same cause of action or to persist in the proceedings (as the case may be),

(f) whether the cause of action is one which the member could

pursue in his own right rather than on behalf of the company.

(3) In considering whether to grant leave to raise derivative proceedings or

an application under section 267, 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.

... "

The circumstances of the present case

[12] The petitioner is the owner of 40 per cent of the shares in the Company. The remaining shares are held by Mr Black (40 per cent) and his wife (20 per cent). The petitioner and Mr Black are stepbrothers. The Company was incorporated in 1984. Its business includes buying and leasing commercial property. The Company has four directors: the petitioner, Mr Black, Mrs Black and a Ms Smith.

[13] The petitioner avers, in summary, that in early 2004 the Company identified three properties suitable for acquisition and leasing by it as part of its business; that in about March 2004 Mr Black entered into a joint venture agreement with a property developer, a Mr Linton, for the acquisition and development of the three properties; that together they formed a new company, SJB, for this purpose; that Mr Black was the sole director of SJB; and that in April 2004 SJB bought two of the properties and leased the third with an option to purchase for a nominal consideration. The total acquisition cost was £2.227m. The petitioner goes on to aver that SJB leased out the properties in 2005, thereby making a substantial profit which would have accrued to the Company had the business opportunity not been diverted from it to SJB. The properties are said to be valued in SJB's accounts at £3.050m. He contends that, in diverting this valuable commercial opportunity to SJB, Mr Black acted in breach of the fiduciary duty which he owed to the Company; and, further, that Mr Black's knowledge can be imputed to SJB, so as to render SJB liable for knowing receipt of the benefit of that breach and for having knowingly assisted in the diversion of the Company's business. He maintains that he learned in July 2007 that SJB had bought the properties, and that, when taxed with having diverted the Company's business to SJB, Mr Black gave a false excuse about the Company's bankers being unwilling to fund the purchase of the properties. It is said that the Company had a good relationship with its bank and had never been refused funding, and that the bank funded the purchases by SJB, which was a newly incorporated company.

[14] In the answers to the petition, lodged on behalf of the Company, Mr Black and SJB, it is admitted that Mr Black and Mr Linton entered into a joint venture agreement for the acquisition and development of the three properties, that they formed SJB as a vehicle for their joint venture, and that SJB acquired the three properties and leased them out as averred by the petitioner. It is maintained that the fact that the properties were for sale was in the public domain; that the Company would not have received the bank funding which it would have needed in order to acquire the properties; that the petitioner knew about SJB's formation, and knew that SJB intended to acquire the three properties; that he knew of the existence and purpose of the joint venture in 2004 but delayed in making an application to the court; and that, given the petitioner's knowledge of the joint venture and its objects, the application was not brought in good faith. In order to support their assertion that the bank would not have funded the acquisition, the respondents rely on an email from a bank official dated 20 December 2002, informally expressed, which indicated a reluctance to make additional funds available for the following 12 to 18 months. In answer to a call to specify when and how they contend that the petitioner became aware of the existence and purpose of the joint venture, or of the fact that SJB intended to acquire the three properties, the respondents aver that the petitioner and Mr Black "spoke to each other on a regular basis" and "discussed the possible acquisition of the said subjects on many occasions".

[15] The petitioner avers that he has asked the Company's board of directors to instruct an independent solicitor to investigate claims against Mr Black and SJB, and if appropriate to pursue such claims, but that the board has refused to do so. He avers that Mr Black has consistently blocked his attempts to have the matter put in the hands of solicitors, and that he has been assisted in this by his wife and Ms Smith, both of whom (it is said) simply follow his wishes. Since the Company will not take proceedings against Mr Black and SJB, the petitioner wishes to commence derivative proceedings asserting the rights of the Company against them. A draft summons is produced with the petition.

Procedure

[16] The application was made in the form of a petition to the Outer House of the Court of Session, on the basis that the application required its own originating process. That approach has not been criticised by the respondents and appears to us to be in accordance with Rule of Court 14.2, which provides:

"Subject to any other provision in these Rules, the following applications to the court shall be made by petition presented in the Outer House:

...

(h) a petition or other application under ... any other enactment ... "

[17] The application came before the Lord Ordinary for a first order for intimation and service, in accordance with Rule 14.5(1). At that stage, the Lord Ordinary considered whether the application should be refused under section 266(3), on the basis that "the application and the evidence produced by the applicant in support of it [did] not disclose a prima facie case for granting it". That approach to the procedure was not criticised by the respondents, and appears to us to be correct. It is clear from section 266(4), which requires service of the application on the company only if the application is not refused under section 266(3), that the court is expected to consider the question arising under section 266(3) prior to service of the application, and therefore ordinarily on an ex parte basis. The opportunity to do so arises at the stage of granting a first order. It is true that Rule 14.5(1) envisages that the granting of a first order will be automatic, unless the petitioner seeks to dispense with intimation, service or advertisement or seeks an interim order (in which event paragraph (2) applies). It provides:

"Subject to paragraph (2), on a petition being lodged, the court shall, without a motion being enrolled for that purpose, pronounce an interlocutor for such intimation, service and advertisement as may be necessary."

Rule 14.5(1) might be contrasted with Rule 58.7, which applies to petitions for judicial review, and confers on the Lord Ordinary a discretion, after hearing counsel, to grant a first order. Notwithstanding the terms of Rule 14.5(1), however, it appears to us that section 266(3) of the 2006 Act requires the court to consider the question arising under that subsection before granting a first order, and to grant such an order only if the application is not then refused. The court must therefore consider the question on the petition being lodged. If it appears to the court at that stage that the application and the evidence produced in support of it do not disclose a prima facie case for granting it, the court must then refuse the application, without a first order being granted. It would be appropriate, ordinarily at least, for the court to afford the petitioner the opportunity of an oral hearing before refusing the application.

[18] In the present case, it did not appear to the Lord Ordinary that the application and the productions lodged in support of it did not disclose a prima facie case for granting it (the double negative reflects the language of section 266(3)). Accordingly, without requiring to hear counsel, the Lord Ordinary granted a first order, expressly "having considered the petition as provided for by section 266 of the Companies Act 2006". Both the Company and the proposed defenders (Mr Black and SJB) were named in the petition as persons upon whom service was sought to be made. The first order however allowed service upon the Company only. That aspect of the order was criticised by the respondents in the proceedings before the Lord Ordinary; and, as we shall explain, answers were lodged in any event on behalf of Mr Black, SJB and the Company jointly, and a solicitor advocate acting on behalf of all three respondents was permitted to be heard on the question whether leave should be granted. It appears to us however that the Lord Ordinary was correct to allow service only upon the Company, for the following reasons.

[19] Sections 265 to 269 of the 2006 Act are concerned with decisions concerning the commencement and continuation of legal proceedings by or on behalf of a company. The provisions are intended to enable inaction on the part of those who would normally decide such matters internally to be overcome in appropriate circumstances, as for example where the inaction may be the product of self-interest. They enable any member of the company, as defined, to seek the court's assistance in taking over the role of the normal decision-makers in relation to particular proceedings. The fundamental issue which the court has to determine is whether it should interfere in the management of the company by overriding the decision of those responsible under the company's articles for the management of its affairs, so as to permit proceedings to be brought on its behalf, by the member, in order to enforce the company's rights. The provisions do not have in view the interests of third parties. The directors have no interest in the proceedings as individuals (other than in the most general sense), by reason of being intended defenders in the derivative proceedings. The court is not being asked to determine any issue affecting their rights or obligations as individuals. Nor does any third party who might be convened as a defender in the derivative proceedings ordinarily have an interest in the leave proceedings: no legal liability will attach to them in consequence of the grant of leave.

[20] These considerations are reflected in the terms of the provisions themselves. Section 266(4)(a) requires service on the company, and section 266(4)(c) provides that the company is entitled to take part in the further proceedings on the application. No mention is made of the director whose alleged "negligence, default, breach of duty or breach of trust" lies at the root of the derivative proceedings, or of any third party who is sought to be convened as a defender. There is no indication in section 266 that the proposed defenders are intended to participate in the proceedings on the application. Furthermore, the nature of the issue raised by the application is reflected in the matters which the court is required to consider. In accordance with section 265, the court requires to be satisfied that the applicant for leave is a member of the company, as defined, and that the proceedings for which leave is sought are in respect of an act or omission involving negligence, default, breach of duty or breach of trust by a director, as defined. In accordance with section 268, the court has to consider the importance that a person acting in accordance with a director's duty under section 172 would attach to raising the proposed proceedings, the authorisation or ratification of the act or omission in question, any decisions taken by the company not to raise or persist in the proceedings, and the views of independent shareholders. These are all matters relating to the governance of the company. The court has in addition to consider the good faith of the applicant and his ability to pursue the cause of action in his own right. There is nothing in the matters to be considered which suggests that it should ordinarily be necessary to hear the proposed defenders.

[21] Contrary to a contention advanced before the Lord Ordinary, the fact that the application contains allegations of breaches of duty on the part of proposed defenders does not give those defenders any interest to be heard. Their rights are fully protected, even if they are excluded from the proceedings on the application. If the application is granted and proceedings are commenced, they will be able to defend the proceedings and, in doing so, to advance the same submissions as to the merits of the proceedings, or as to their being motivated by any ulterior or improper purpose, as they might otherwise have made on the application for leave. They will be able to do so in the same way as any other litigant. There is no reason why the intended defenders in derivative proceedings should have an earlier opportunity to oppose the proceedings than do the defenders in other proceedings, merely because the derivative proceedings must be preceded by an application for leave.

[22] Furthermore, it is apparent from the Law Commission report that the proceedings on the application for leave are not intended to be lengthy or costly. If it is appropriate that proceedings should be brought on behalf of the company, it is desirable (and may be vital, if a right of action is otherwise liable to be extinguished by prescription) that the commencement of the proceedings should not be unduly delayed. Equally, it is undesirable that members should be deterred from seeking leave, in appropriate cases, by the prospect of lengthy and costly procedure. These are further reasons why additional participants in proceedings on the application for leave, besides the company as envisaged by section 266, should not normally be permitted.

[23] There is a further reason why the proposed defenders should not ordinarily be involved in the proceedings. The purpose of the proceedings is to determine whether any or all of the proposed defenders should be sued on behalf of the company. It is likely, as explained below, that consideration will be given to the prospects of success of the derivative proceedings. Any weaknesses in the company's claim against the proposed defenders may be considered. Any internal company documentation which tends to undermine the claim is liable to be produced. Affidavits taken from potential witnesses may also be produced. It is not in the interests of the company, in a situation where the court is liable to authorise the raising of proceedings, that the potential defenders in those proceedings should be given advance notice of weaknesses in the company's case and of documents and witnesses which would be helpful to their defence. In practice, that may be difficult to avoid in the case of an intended defender who remains a director of the company; but it is a reason for avoiding, so far as possible, the unnecessary involvement of intended defenders in the leave proceedings.

[24] In this connection, we note that even where proceedings have already been raised by the company, and the question is whether a member should be given leave to continue them as derivative proceedings, section 267 requires a separate application to be made which, if not refused at the ex parte stage, is then served on the company in accordance with section 267(4)(a); and the company is then entitled to take part in the further proceedings on the application, in accordance with section 267(4)(c). The requirement that the application for leave be dealt with separately from the substantive proceedings is consistent with our conclusion that the application, as a matter concerned with the management of the company, is not a matter in which the defenders in the substantive proceedings ordinarily have an interest which should be recognised; and that there are, in addition, compelling practical reasons why the defenders in the substantive proceedings should not ordinarily be party to the leave proceedings.

[25] We have reached our conclusion in relation to this matter without reference to authority, but note that a similar conclusion has been reached in other jurisdictions where leave must be sought before derivative proceedings are commenced. Relevant decisions include Lederer v 372116 Ontario Ltd (2001) 53 OR (3rd) 203, a decision of the Court of Appeal for Ontario; Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 973 and Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002, decisions of the Supreme Court of New South Wales; and O'Meara v FWV Stanke Holdings Pty Ltd [2007] SASC 286, a decision of the Supreme Court of South Australia.

[26] The first order in the present case allowed the Company and any other party claiming an interest to lodge answers to the petition. We note that section 266 makes no express provision for the lodging of answers. The company is however entitled, following service, "to take part in the further proceedings on the application". The lodging of answers by the company is likely to be helpful in focusing the issues for the court, and it appears to us that the court is entitled to allow answers to be lodged by the company, following service, as part of its participation in the further proceedings on the application. In the present case, a single set of answers to the petition were lodged on behalf of the Company and each of the proposed defenders, and the proposed defenders were then allowed to take part in the proceedings, jointly with the Company. For the reasons we have explained, that was in our view inappropriate.

[27] Following the lodging of answers, the Lord Ordinary allowed parties to adjust their pleadings. He was then invited by the petitioner to allow a hearing on the petition and answers, with a view to deciding whether there was a prima facie case against the proposed defenders and, if so, whether leave should be granted. On behalf of the respondents, on the other hand, it was argued that the test of a prima facie case was relevant only at the ex parte stage under section 266(3), and that at the stage of an inter partes hearing under section 266(5) the petitioner must prove his entitlement to raise the derivative proceedings on a balance of probabilities. Since the petitioner's good faith was challenged, a proof should be allowed. It was contended that, since the question of good faith impinged upon essentially every issue pled by the petitioner and the respondents, the proof would require to cover the merits of the proposed claim. The Lord Ordinary accepted that, if there were some specific point of fact which required to be established, the court might be prepared to allow evidence to be adduced on that point. He considered, however, that to allow a full dress rehearsal on all the matters likely to be put in issue in the derivative action if leave were to be granted would be contrary to the intention of the 2006 Act. He directed that affidavits should be lodged in respect of the matters on which the respondents relied as demonstrating the petitioner's lack of good faith. He then dealt with the application at a hearing on the petition and answers, at which reference was made to the documents and affidavits which had been lodged.

[28] The Lord Ordinary's decision to hold a hearing in that form, rather than a proof, was conceded before us to have been appropriate. That concession was in our view correctly made. The form of hearing which is appropriate reflects the nature of the task which the court has to perform; and we discuss below the nature of the court's function when dealing with an application for leave at a hearing under section 266(5). For reasons we shall explain, we are satisfied that, although section 266(5) confers upon the court a wide discretion as to procedure ("the court may ... make such order as to further procedure as it thinks fit"), and the relevant rule of court (Rule 14.8) is equally expansive, such applications, if opposed, should ordinarily be dealt with at a hearing on the petition and answers, with evidence taking the form of documentary productions and affidavits. The intention, put shortly, is that this should ordinarily be a summary form of procedure.

[29] Following the hearing, the Lord Ordinary granted the application, and also made an order designed to secure that the company paid the petitioner's expenses, and indemnified him against any liability in expenses, in respect of the derivative proceedings. In this reclaiming motion, it has been argued that the Lord Ordinary misdirected himself as to the approach to be followed in determining under section 266(5) whether to grant the application, in particular in failing to give adequate consideration to the strength of the case against the proposed defenders in the derivative proceedings; and, in addition, that the order which he made in respect of expenses was incompetent and in any event inappropriate. We accordingly turn next to consider the first of those issues.

The approach to be followed when considering the application

[30] At this early stage in the development of the law on the statutory derivative proceedings created by the 2006 Act, it would be unwise to attempt to state comprehensively or definitively the approach which should be followed by the court when considering an application for leave. The law will develop incrementally as different factual circumstances, and different arguments, come before the courts. Our observations reflect the circumstances of the present case, and the submissions which were made.

[31] As we have explained, section 266 (like the corresponding provision for England and Wales, in section 261) envisages a two-stage procedure. At the first stage, in accordance with section 266(3), the court considers only the application and the evidence produced by the applicant in support of it. The court must refuse the application at that stage "if it appears to the court that the application and the evidence produced in support of it do not disclose a prima facie case for granting it". It is to be noted that the question is not whether the application and supporting evidence disclose a prima facie case against the defenders in the proposed derivative proceedings, but whether there is no prima facie case disclosed for granting the application for leave. That requires the court to consider whether the application falls within the scope of section 266 - in other words, whether the application has been made by a member of a company, as defined by section 265(7), and whether it concerns "derivative proceedings" within the meaning of section 265(1); whether it complies with the requirements of section 266(2); and whether it should be granted, applying the provisions of section 268(1), (2) and (3). We consider these provisions below. It is to be noted that no onus is placed on the applicant to satisfy the court that there is a prima facie case: rather, the court is to refuse the application if it is satisfied that there is not a prima facie case.

[32] If the application is not refused at the first stage, it then proceeds to a hearing in which the company is entitled to take part, and at which the court may have before it evidence produced by the company. The court then has to reach a final decision whether to grant the application or to refuse it. The court will again have to consider whether it is satisfied that the application falls within the scope of section 266 and complies with the requirements of that section. The court will again have to consider the factors specified in section 268(2), and any other relevant circumstances. In accordance with section 268(3), it must again have particular regard to any evidence as to the views of members of the company who have no personal interest, direct or indirect, in the matter. If it is satisfied as to any of the matters mentioned in section 268(1), then it must refuse the application. Otherwise, it must decide whether, in its judgment, the application ought to be granted. It is to be noted that no onus is placed on the applicant by section 268 to satisfy any specific requirements. The applicant is not required, for example, to satisfy the court that a person acting in accordance with section 172 would seek to raise the derivative proceedings: instead, section 268(1)(a) requires the court to refuse the application if it is satisfied that such a person would not seek to raise the proceedings.

[33] There are thus three significant differences between the first stage and the second stage: at the first stage, the material before the court is confined to the application and the supporting evidence produced by the applicant, whereas at the second stage the court may also have material placed before it by the company; at the first stage any hearing will normally be ex parte, whereas at the second stage the company is entitled to be heard; and at the first stage the court need only consider whether there is a prima facie case for granting the application, whereas at the second stage the court must decide whether the application should actually be granted. The matters which are in principle relevant to the court's decision are however the same at each stage: in particular, it is necessary at both stages to consider the requirements of section 265 and the factors listed in section 268, together with any other relevant circumstances.

[34] In the present case, the Lord Ordinary considered that there were two elements which the court must consider at the section 266(3) stage: first, whether the petitioner had disclosed a prima facie case that there had been a relevant act or omission (within the meaning of section 265(3)) by one or more directors of the company, and secondly whether the petitioner had disclosed a prima facie case that those responsible for that act or omission were and remained in majority control, thus preventing the institution of proceedings at the instance of the company. As the Lord Ordinary noted, this approach reflected the test suggested by the Court of Appeal for the granting of leave prior to the 2006 Act, in Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch.204 at pages 221-222:

" ... the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle."

The Lord Ordinary commented that it was significant that the "merits" question, i.e. whether there had been a relevant act or omission by a director, was not addressed in the various enumerated matters of which the court must take account at the inter partes stage: the structure of the Act focused attention, after the ex parte stage, and on the assumption that a prima facie case had been disclosed, on factors which were germane to the question whether the applicant should be allowed to bring the action against the wishes of the company. In the event, the Lord Ordinary's discussion of whether leave should be granted was concerned solely with the question of the petitioner's good faith, on the basis (which was disputed before us by counsel for the respondents) that that was the only ground on which the respondents argued that the application for leave should be refused.

[35] It was submitted to us that the Lord Ordinary had erred in approaching matters on this basis. The merits of the proposed action had to be considered at both the first stage and the second stage. What was required on the merits was more than a prima facie case, as that expression was understood in the context of applications for interim interdict: a more demanding test was appropriate, such as the test of a "good arguable case" employed in recent cases concerned with the use of diligence on the dependence. The merits were relevant not merely insofar as they might bear on the matters listed in section 268, but as a factor to be considered on its own account. The court should assess the strengths of the respective cases on the basis of the pleadings, productions and affidavits. The Lord Ordinary had not addressed the strength of the proposed claim, or any of the matters listed in section 268(2) other than the question of the petitioner's good faith. It was accepted that that was the question on which the respondents had principally focused in their submissions to the Lord Ordinary, but he was nevertheless required to consider all the matters listed.

[36] We are unable to agree either with the approach adopted by the Lord Ordinary or with the submissions made on behalf of the respondents. It is true that the range of factors which the court is entitled to take into account is not limited by the legislation: although section 268(2) lists factors which must be taken into account, that list is prefaced by the words "in particular", and is therefore non-exhaustive. Nevertheless, it does not appear to us that the strength of the proposed case was intended ordinarily to be addressed as a separate consideration. That is not to say that the strength of the proposed case is irrelevant. In the first place, as we have explained, section 268(2)(a) requires the court to consider whether the member is acting in good faith in seeking to raise the proceedings. We do not propose to consider that provision in detail, as it was not discussed before us: the Lord Ordinary's conclusion, that the allegation that the petitioner was not acting in good faith had not been made out, was not challenged. We observe however that it is possible that, at least in certain circumstances, that provision might require the court to give consideration to the view which the petitioner might reasonably hold of the merits of the proposed proceedings. In that regard, we note the approach which has been adopted by the courts of other jurisdictions (notably in Canada and Australia) where similar provisions exist.

[37] Secondly, and perhaps more importantly, the court is required by section 268(2)(b) to consider the importance that a person acting in accordance with section 172 would attach to raising the proceedings; and section 268(1)(a) requires the court to refuse leave if satisfied that a person acting in accordance with section 172 would not seek to raise them. Section 172 requires a director of a company to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard amongst other matters to a number of listed considerations, including the likely consequences of any decision in the long term. A hypothetical director acting in accordance with section 172, and considering whether to commence legal proceedings, could ordinarily be expected to have regard to a range of factors, including the amount at stake, the apparent strength of the case, the prospects of securing a satisfactory outcome without litigation, the prospects of successful execution of any judgment, the likely cost of the proceedings, the disruption caused to the company's business, and potential risks to reputation and business relationships. In practice, directors ordinarily have to take decisions as to whether the instruction of legal proceedings is appropriate on the basis of only partial information, without undertaking a lengthy investigation of the merits of the proposed case. In relation to this matter also, we note that there is a body of Commonwealth case law concerned with the application of analogous (but not identical) provisions.

[38] The court is thus required by section 268(2)(b) to give some consideration to the strength of the proposed case, at both the first stage and the second stage. We find it difficult to conceive of the court's doing other than to refuse the application if it considered, at either stage, that there was not an arguable case against the proposed defenders. In so far as the Lord Ordinary's opinion might be understood as meaning that, if the court is satisfied at the first stage that the derivative claim is arguable, the merits of the claim then drop out of further consideration, that is not in our opinion the correct approach. Nor is the court's consideration at the first stage confined to the two matters mentioned by the Lord Ordinary: as we have explained, the range of matters which the court may take into account is not restricted by the legislation, but those matters must in any event include the considerations listed in section 268(2) (and, in relation to the competency of the application, the considerations arising from section 266). Nor, in relation to the second matter mentioned by the Lord Ordinary, can we endorse a rule that leave can only be granted where the directors whose breach of duty is in issue were and remain in majority control: in practice, that is likely to be the position in many cases where leave is appropriately granted, but, as we have explained, one of the objects of the 2006 Act was to introduce more flexible criteria than the former "fraud on the minority" exception to the rule in Foss v Harbottle. The common law requirement of "wrongdoer control", in particular, had given rise to difficulty in a number of cases (including Prudential Assurance Co Ltd v Newman Industries), and is not repeated in section 268.

[39] As we have explained, the merits of the proposed derivative proceedings bear on the issue raised by section 268(2)(b), in particular. It is not however appropriate that the merits should be investigated in detail. It is clear from the Law Commission report that one of the objectives underlying their recommendations was to avoid a detailed investigation into the merits of the case taking place at the leave stage, since such a "mini-trial" would be time-consuming and expensive. As the Lord Ordinary observes, the very nature of the control mechanism which the leave requirement has introduced into Scots law must mean that the process at that stage is not intended to be lengthy and drawn out: otherwise, the unprincipled shareholder would be able to use the leave application to drag the company through all the anguish and expense of the litigation which it is the object of the legislation to avoid; and, on the other side of the coin, those in control of the company would be able to use their superior resources to stifle or delay meritorious claims. The dangers are illustrated by experience in England and Wales, where leave applications have been in use for much longer. As the Court of Appeal observed in Prudential Assurance Co Ltd v Newman Industries Ltd at page 22, it cannot be right to subject the company to lengthy proceedings in order to decide whether the plaintiff is entitled to subject it to lengthy proceedings. Furthermore, it appears from the terms of section 266 that Parliament envisaged that leave would be obtained prior to the raising of the derivative proceedings: that appears, in particular, to be the implication of the use of the future tense in section 266(2)(b) ("the facts on which the derivative proceedings are to be based"). The obligation which the derivative proceedings seek to enforce is however liable (depending on its nature) to be extinguished by prescription if there is delay in the raising of the proceedings. There was some discussion before us of the question whether the court would have jurisdiction to entertain derivative proceedings which had been raised without leave and to grant leave retrospectively (as has been held to be possible in an Australian decision: South Johnstone Mill Ltd v Dennis and Scales [2007] FCA 1448). It is however unnecessary for us to consider that question for the purposes of the present case. Whether or not the potential problem with prescription may be capable of being resolved, Parliament's apparent intention that leave should be obtained prior to the raising of the derivative proceedings is a further reason for concluding that Parliament cannot have intended the determination of the leave application to be delayed by a detailed investigation of the merits of the proposed claim. In our opinion, the approach which should be aimed at is that described by Lord Denning MR, anticipating the leave procedure which was subsequently introduced, in Wallersteiner v Moir (No 2) at page 392:

" ... this preliminary application should be simple and inexpensive. It should not be allowed to escalate into a minor trial."

[40] It is also relevant in this connection that section 268 does not impose any threshold test in relation to the merits of the derivative proceedings. As we have explained, the Law Commission recommended that there should be no such test, partly in order to avoid the risk of a detailed investigation into the merits of the case taking place at the leave stage, and partly to avoid the drawing of fine distinctions based on the language of a particular rule. Section 268, and the parallel provision for England and Wales and Northern Ireland in section 263, do not depart from that recommendation. That is consistent with the nature of the factor to be considered under section 268(2)(b): it is possible to conceive of circumstances in which a director acting in accordance with section 172 might attach great importance to raising proceedings which were merely arguable, and of other circumstances in which a director might have sound business reasons for attaching little importance to raising proceedings which had good prospects of success. The court should accordingly take into account all the relevant circumstances, including those listed in section 268(2). If the court is satisfied of either of the matters mentioned in section 268(1), it must refuse leave. Otherwise, the decision whether to grant leave is a matter for the judgment of the court.

Whether leave should be granted in the present case

[41] Since it is not clear that the Lord Ordinary approached the matter on the correct basis, it is appropriate that we should ourselves consider whether the application should be granted. We can do so briefly.

[42] It is accepted that the petitioner is a member of the Company, that the application relates to derivative proceedings as defined by section 265(7), and that it complies with the requirements of section 266(2). Turning to the factors listed in section 268(2), the Lord Ordinary's conclusion, that the allegation that the petitioner was not acting in good faith had not been made out on the evidence, was not disputed before us. On the facts of the present case, the factors mentioned in section 268(2)(c) and (d), and in section 268(3), do not arise. It is not entirely clear whether the Company has decided not to raise proceedings in respect of the cause of action: such a decision, in the present case, would in any event add nothing of substance to the circumstances before the court. The two remaining factors listed in section 268, namely those mentioned in subsection (2)(b) and (f), require to be considered in greater detail.

[43] Under section 268(2)(b), as we have explained, the court must take into account the importance that a person acting in accordance with section 172 would attach to raising the derivative proceedings. As we have explained, there are a variety of factors which may be relevant in that regard, including the prospects of success of the proposed proceedings, so far as they can be judged. It was argued before us that the proposed claim lacked reasonable prospects of success, since (on the respondents' account) the opportunity allegedly diverted by Mr Black to SJB was one which was publicly available and which the Company was not, for financial reasons, able to pursue. It is inappropriate for us to express any detailed or concluded view upon the merits of an action which has not yet been raised. It is sufficient to say that, having regard to the authorities on the fiduciary duties of company directors (including in particular, Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 at pages 471-472 per Lord Cranworth LC, Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 at pages 144-145 per Lord Russell of Killowen, Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 433 at page 453 and Bhullar v Bhullar [2003] 2 BCLC 241 at paragraph 41), and authorities on the accessory liabilities of third parties (including those considered in Commonwealth Oil & Gas Co Ltd v Baxter [2007] CSOH 198), and also taking into consideration the affidavits and productions, we consider that the proposed derivative proceedings are undoubtedly arguable. So far as we can judge at this stage, the amounts potentially recoverable from the proposed defenders appear to be sufficiently substantial to justify the costs which may be incurred as a consequence of raising proceedings. It was not suggested, and it is not apparent to us, that there are any substantial countervailing factors which would lead a director acting in accordance with section 172 to attach little or no importance to raising the proposed proceedings.

[44] Under section 268(2)(f), the court must take into account whether the cause of action is one which the member could pursue in his own right rather than on behalf of the company. In that regard, it was argued on behalf of the respondents that the petitioner could obtain a satisfactory remedy by means of a petition under section 994, on the basis that the Company's affairs were being conducted in a manner which was unfairly prejudicial to his interests. An order might then be made for him to be paid the value of his shareholding. If it were established that the value of the company had been diminished as a result of any breach of duty by Mr Black, the court might reflect that in the order which it made. Since an adequate remedy was available, derivative proceedings should not be permitted: Barrett v Duckett [1995] BCC 362 at page 367 per Peter Gibson LJ].

[45] As we have explained, the expression "cause of action" bears a special meaning in the context of these provisions: it is defined by section 265(7) as referring to the act or omission in respect of which the derivative proceedings are raised. In terms of section 265(3), the act or omission must be one involving negligence, default, breach of duty or breach of trust by a director of the company. Giving the words "cause of action" that special meaning, section 268(2)(f) might be said to be somewhat infelicitously expressed: one would not ordinarily speak of "pursuing" an act or omission. What is presumably meant is however sufficiently clear: the question is whether the member could bring proceedings in his own right so as to obtain a remedy in respect of the act or omission in question. So understood, section 268(2)(f) requires the court to take into account the availability of alternative remedies, but their availability is not necessarily conclusive on the question whether or not leave should be granted.

[46] In the circumstances of the present case, we accept that the allegations made by the petitioner against Mr Black might form the basis of a petition under section 994. Such proceedings would however constitute, at best, an indirect means of achieving what could be achieved directly by derivative proceedings; and they could not provide any remedy against SJB. The petitioner's complaint is that Mr Black has acted unlawfully, with SJB's knowing assistance; not that the Company's affairs have been mismanaged. The relief the petitioner seeks is to have the Company restored to the position in which it ought to be, by an order for restitution or damages; not that he should be bought out. In that regard, we note that an order requiring him to be bought out at the present time, when the commercial property market is depressed, would not be an attractive remedy. The order sought in the proposed derivative proceedings, that the properties in question be declared to be held by SJB upon a constructive trust for the Company, would in reality be a more valuable remedy, since the petitioner could then benefit from any rise in the value of his shareholding over the longer term, consequent upon a recovery in the market. Furthermore, any inquiry into whether there had been mismanagement, or into the price at which the petitioner should be bought out, would require the court to establish the truth or otherwise of the petitioner's allegations, and the value of any property held by SJB which had been acquired through Mr Black's breach of his duties to the Company: the same issues as would be raised more directly, and with the possibility of SJB's participating in the action and being ordered to make restitution or to pay damages, if derivative proceedings were permitted. We also note that the Company does not appear to be deadlocked, and that it continues to trade. In these circumstances, the availability of an alternative remedy under section 994 does not appear to us to be a compelling consideration.

[47] Exercising our discretion under section 266(5) in the whole circumstances of the case, and taking into account the matters mentioned in section 268(2) so far as relevant, we conclude that the application should be granted.

[48] In terms of section 266(5), the court may grant the application "on such terms as it thinks fit". Subject to the question of an indemnity order in relation to expenses, which we consider next, it was not suggested that any terms should be imposed. In particular, it was not suggested that leave should be granted on terms which would enable the court to exercise a continuing supervision over the conduct of the derivative proceedings, for example by granting leave to raise the derivative proceedings subject to a requirement to obtain the authorisation of the court before continuing with the proceedings beyond a specified stage.

Indemnity in relation to expenses

[49] We turn next to the question of an indemnity. In relation to this question also, we wish to emphasise that, this being the first case of its kind, it is not our intention to attempt to state comprehensively or definitively the approach which should be followed by the court. The law on this matter must be allowed to develop incrementally. Our observations are based on the circumstances of the present case, and the submissions which were made.

[50] The Lord Ordinary attached to the grant of leave an order in the following terms:

"(2) orders that the Company ....

(i) pays the Petitioner's legal expenses incurred in respect of or connected with the said derivative proceedings on an agent [and] client, client paying, basis from today's date until the Procedural Hearing in the Commercial Court in the said proceedings and

(ii) indemnifies the Petitioner against all awards of expenses made against him in the said proceedings up until the said Procedural Hearing,

reserving to the Petitioner the right, if so advised, to apply in this Petition for a similar order to cover further stages of the derivative proceedings; and

(3) continues the cause in respect of all questions of expenses, including, for the avoidance of doubt, any further application which may be made in terms of paragraph (2) above".

The Lord Ordinary considered that such an order fell within the scope of the court's statutory power under section 266(5) to "grant the application on such terms as it thinks fit": a requirement that the company indemnify the member in relation to the expense involved in bringing the derivative proceedings was a "term" on which the application could be granted. In that regard, the Lord Ordinary noted that such orders were not uncommon in English practice prior to the 2006 Act, although they had no statutory basis. There were compelling reasons for making such an order in an appropriate case, for the reasons explained in Wallersteiner v Moir (No.2). It was the intention of the Scottish Law Commission that the law and procedure in Scotland and England should be similar. Parliament must therefore have intended such a power to be included within the terms which the court could impose on the grant of leave. On behalf of the respondents, on the other hand, it was submitted that the Scottish Law Commission had recommended that the court should be given a specific statutory power to order an indemnity, but no such provision appeared in the 2006 Act. Section 266(5) enabled the court to attach conditions to the grant of leave: conditions, that is to say, which applied to the member to whom leave was granted. It did not empower the court to impose upon the company an obligation to indemnify the member.

[51] The basis for making costs indemnity orders in English law was considered by the Court of Appeal in Wallersteiner v Moir (No.2): a case which we require to consider in some detail. Lord Denning MR characterised the position of a minority shareholder who brings an action on behalf of the company, to obtain redress on its behalf, as being analogous to that of an agent. In consequence, the shareholder had a right to be indemnified in respect of costs reasonably incurred:

"This indemnity does not arise out of a contract express or implied, but it arises on the plainest principles of equity...... 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. And all the additional costs (over and above party and party costs) should be taxed on a common fund basis and 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 interests 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.....This indemnity should extend to his own costs taxed on a common fund basis" (pages 391-392).

[52] Buckley LJ drew an analogy (at page 399) with the position of a trustee bringing proceedings to protect the trust estate, but acknowledged that the analogy was far from exact. His Lordship also observed (at page 400) that the shareholder was, in effect, "permitted by the court to sue as the agent, albeit unauthorised, of the company, rather like the next friend or guardian ad litem of a party under a disability". Buckley LJ developed these analogies further, at pages 403-404:

"But there are circumstances in which a party can embark on litigation with a confident expectation that he will be indemnified in some measure against costs. A trustee who properly and reasonably prosecutes or defends an action relating to his trust property or the execution of the trusts is entitled to be indemnified out of the trust property. An agent is entitled to be indemnified by his principal against costs incurred in consequence of carrying out the principal's instructions ....The next friend of an infant plaintiff is prima facie entitled to be indemnified against costs out of the infant's estate:.....It seems to me that in a minority shareholder's action, properly and reasonably brought and prosecuted, it would normally be right that the company should be ordered to pay the plaintiff's costs so far as he does not recover them from any other party. In all the instances mentioned the right of the party seeking indemnity to be indemnified must depend on whether he has acted reasonably in bringing or defending the action, as the case may be: see, for example, as regards a trustee, In re Beddoe, Downes v Cottam [1893] 1 Ch.557. It is true that this right of a trustee, as well as that of an agent, has been treated as founded in contract. It would, I think, be difficult to imply a contract of indemnity between a company and one of its members. Nevertheless, where a shareholder has in good faith and on reasonable grounds sued as plaintiff in a minority shareholder's action, the benefit of which, if successful, will accrue to the company and only indirectly to the plaintiff as a member of the company, and which it would have been reasonable for an independent board of directors to bring in the company's name, it would, I think, clearly be a proper exercise of judicial discretion to order the company to pay the plaintiff's costs. This would extend to the plaintiff's costs down to judgment, if it would have been reasonable for an independent board exercising the standard of care which a prudent business man would exercise in his own affairs to continue the action to judgment. If, however, an independent board exercising that standard of care would have discontinued the action at an earlier stage, it is probable that the plaintiff should only be awarded his costs against the company down to that stage".

The procedural solution which Buckley LJ proposed, and which the other members of the court accepted, was modelled on the procedure already established in the case of trustees, and was explained by Buckley LJ at pages 404-405:

"There is a well established practice in Chancery for a trustee who has it in mind to bring or defend an action in respect of his trust estate to apply to the court for directions: see In re Beddoe, Downes v Cottam [1893] 1 Ch.557. If and so far as he is authorised to proceed in the action, the trustee's right to be indemnified in respect of his costs out of the trust property is secure. If he proceeds without the authority of an order of the court, he does so at his own risk as to costs. It seems to me that a similar practice could well be adopted in a minority shareholder's action .....After issuing his writ a minority shareholder plaintiff could apply by summons in the action for directions as to whether he should proceed in the action and, if so, to what stage without further directions.......

Upon the effective hearing of the summons the court would determine whether the plaintiff should be authorised to proceed with the action and, if so, to what stage he should be authorised to do so without further directions from the court. The plaintiff, acting under the authority of such a direction, would be secure in the knowledge that, when the costs of the action should come to be dealt with, this would be upon the basis, as between himself and the company, that he has acted reasonably and ought prima facie to be treated by the trial judge as entitled to an order that the company should pay his costs, which should, I think, normally be taxed on a basis not less favourable than the common fund basis, and should indemnify him against any costs he may be ordered to pay to the defendants".

[53] Scarman LJ, like Lord Denning, considered that the shareholder had a right to an indemnity in respect of his costs on the same basis as an agent or a trustee, stating (at page 407):

"I agree that it is open to the court in a stockholder's derivative action to order that the company indemnify the plaintiff against the costs incurred in the action. I think that the principle is the same as that which the court applied in In re Beddoe; Downes v Cottam [1893] 1 Ch.547, which concerned the costs incurred by a trustee in an action respecting the trust estate. The indemnity is a right distinct from the right of a successful litigant to his costs at the discretion of the trial judge; it is a right which springs from a combination of factors - the interest of the company and its shareholders, the relationship between the shareholder and the company, and the court's sanction (a better word would be 'permission') for the action to be brought at the company's expense. It is a full indemnity such as an agent has who incurs expense in the authorised business of his principal".

[54] The Court of Appeal thus proceeded on the basis that the plaintiff in a derivative action stands to the company in a relationship analogous to agent and principal or trustee and beneficiary. On that basis, the court devised a procedure whereby the shareholder could apply in advance to the court for authority to bring the action on behalf of the company, anticipating the statutory procedure now to be found in Part 11 of the 2006 Act. The grant of that authority, similar to the authority which the court might give to a trustee to bring or defend proceedings in his capacity as a trustee, would have the result that as between the shareholder and the company the shareholder could ordinarily expect to be indemnified for his costs out of the assets of the company.

[55] Following the decision in Wallersteiner v Moir (No.2), there was at least one reported case (Jaybird Group Ltd v Greenwood [1986] BCLC 319) in which the court made an order for the payment of costs to be incurred in derivative proceedings after the date of the order. In 1994 a rule of court was introduced (RSC, Order 15, rule 12A(13)) which permitted the plaintiff to include, in an application for permission to continue derivative proceedings, an application for an indemnity out of the assets of the company in respect of costs "incurred or to be incurred" in the action.

[56] Shortly before that rule of court came into force, pre-emptive costs orders (as they were described) were considered by the Court of Appeal in McDonald v Horn [1995] ICR 685. The case concerned proceedings brought by beneficiaries of a pension scheme against the pension fund trustees. An order had been made at first instance requiring that the plaintiffs' costs, and any costs which they might be ordered to pay to the defendants, for the period from the date of the application for the order until the close of discovery, should be paid on an indemnity basis out of the pension fund. The order was upheld on appeal. Hoffmann LJ, giving the principal judgment, observed that the court's jurisdiction to deal with litigation costs was based upon statute. The discretion conferred by the statute was by no means untrammelled, but must be exercised in accordance with the rules of court and established principles. The general principle was that costs followed the event. That was a formidable obstacle to any pre-emptive costs order as between adverse parties in ordinary litigation. There was however a special principle which applied to the costs of trustees and other fiduciaries. In the case of a fund held on trust, the trustee was entitled to his costs out of the fund on an indemnity basis, provided that he had acted not unreasonably or in substance for his own benefit rather than that of the fund. Trustees were able to protect themselves against the possibility that they might be held to have acted unreasonably or in their own interest by applying at an early stage for directions as to whether to bring or defend the proceedings. This principle had also been applied in certain other situations concerning fiduciaries. In Wallersteiner v Moir (No.2) this special principle had been extended to derivative actions, and the related procedure had been imported into company law from trusts. Hoffmann LJ accepted (at page 698) that the beneficiaries of the pension fund fell within the scope of the same principle:

"In both cases a person with a limited interest in a fund, whether the company's assets or pension fund, is alleging injury to the fund as a whole and seeking restitution on behalf of the fund".

Hoffmann LJ also observed (at page 700):

"The power to make a Wallersteiner v Moir order in a pension fund case should in my view be exercised with considerable care. The judgment of Walton J in Smith v Croft [1986] 1 WLR 580 contains a useful reminder of the dangers of too easily making orders which allow minority shareholders to litigate at the cost of the company......

The need for caution in making such orders does not however mean that the judge or master should undertake a close examination of the merits of the dispute. The question is whether the plaintiffs have shown a sufficient case for further investigation".

His Lordship approved an approach whereby, rather than granting a blanket indemnity to cover the whole of the future litigation, the court made an indemnity order covering only a particular stage of the litigation, on the basis that the matter would be reviewed at the end of that stage.

[57] The practice in England in relation to derivative actions is currently regulated by Rule 19.9E of the Civil Procedure Rules, which provides that the court may order the company for the benefit of which a derivative claim is brought to indemnify the claimant against liability for costs incurred in the permission application or in the derivative action or both.

[58] In Scots law, also, "the general rule....is that costs follow the event" (Shepherd v Elliott (1896) 23 R 695 at page 696 per Lord President Robertson; MacLaren, Expenses in the Supreme and Sheriff Courts in Scotland, page 21). Certain categories of litigant have however a right to recover their expenses from funds or persons for whose benefit they have taken part in the proceedings, and to be relieved of any liabilities in expenses which they have incurred in those proceedings. In particular, trustees are entitled to recover out of the trust estate the expenses of litigation which they have conducted reasonably and in good faith in the interests of the trust (MacLaren, Expenses, page 184). As Lord McLaren stated in Gibson v Caddall's Trustees (1895) 22 R 889 at page 893:

"It is always understood that where trustees, acting in the discharge of their duty, litigate in the name of the trust-estate and for the protection of the interests of the trust, they are entitled to charge the trust with the account for expenses, upon the principle that representative persons are entitled to the costs necessarily incurred in the interests of their constituents. It would, I think, be unfair that their right should depend upon the circumstances of their being successful in the litigation; and if such a rule were established, I imagine that it would be difficult to find persons willing to become trustees".

As appears from that dictum, the principle applicable in relation to expenses incurred by trustees (or for which they are found liable) reflects a wider principle of the law: "the principle that representative persons are entitled to the costs necessarily incurred in the interests of their constituents". It is also reflected in the treatment, in relation to expenses, of trustees in bankruptcy, liquidators (see e.g. Smith v Lord Advocate 1978 SC 259 at pages 272-273 per Lord President Emslie) and judicial factors (MacLaren, Expenses, page 228). The wider principle can also be seen in other analogous contexts. One such context is agency. An agent has a right against his principal to be reimbursed all expenses and to be indemnified against all losses and liabilities incurred by him in the execution of his authority (Bowstead & Reynolds on Agency, Eighteenth Edition, paragraph 7-056). That principle applies, in particular, to expenses and liabilities arising from litigation (see e.g. Re Famatina Development Corp Ltd [1914] 2 Ch.271, discussed in Tomlinson v Liquidators of Scottish Amalgamated Silks Ltd 1935 SC (HL) 1). Another relevant context is that traditionally designated negotiorum gestio: that is to say, the benevolent administration of another person's affairs without that person's authorisation, in circumstances where the person is unable to manage his own affairs by reason, for example, of absence or incapacity. In such circumstances, the gestor is entitled to be reimbursed for the expense which he has properly incurred, even if it has not ultimately proved to be beneficial, and to be relieved of all liabilities (Bell, Principles of the Law of Scotland, Tenth Edition, paragraph 541).

[59] A shareholder who is given leave by the court to raise derivative proceedings under section 265 does so "in order to protect the interests of the company and obtain a remedy on its behalf". Ex hypothesi, the court has decided, after considering a range of factors including the shareholder's good faith, that it is reasonable that he should raise the proceedings in the interests of the company and on its behalf. Unless leave has been given on a staged basis, however - that is to say, unless leave is granted on terms which enable the court to keep under review the reasonableness of the continuation of the proceedings - the court cannot presume that it is necessarily reasonable that the shareholder should continue with the proceedings after raising them. The apparent strength of the shareholder's case may diminish, for example, as more becomes known about the relevant facts; or a reasonable offer in settlement may be made. Since the shareholder is seeking a remedy on the company's behalf, he ordinarily falls within the scope of the general principle which we have discussed, and is entitled to be indemnified by the company in respect of liabilities and expenses reasonably incurred in the interests of the company; but, prima facie, it cannot be predicted whether any particular liability or expense incurred in connection with the derivative proceedings should be the subject of such an indemnity.

[60] We have said that the shareholder raising derivative proceedings "ordinarily" falls within the scope of the relevant principle because the court's power to grant leave on terms enables it to impose terms which modify or exclude the application of that principle. It is possible to conceive of circumstances in which the court might hesitate to grant leave, if the effect of doing so were to require the company to indemnify the member even if the proceedings proved to be unsuccessful. An example of such circumstances might be a case where the shareholder had ample means and the company was impecunious (as, for example, in the Australian case of Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 1007). It would be open to the court to grant leave in such a case on a basis which protected the company's position: for example, by limiting the extent of any indemnity to the amount, if any, which was recovered by the company as a result of the derivative proceedings.

[61] In general, however, we have no difficulty accepting that a shareholder who is the pursuer in derivative proceedings is, for the purposes of expenses, in an analogous position to that of a trustee or an agent, and that the court should therefore, in appropriate circumstances, order that he should be indemnified by the company in respect of his own expenses, to the extent that they are not recovered from other parties to the derivative proceedings, and in respect of any awards of expenses which may be made against him in favour of other parties to those proceedings.

[62] A claim for indemnity or relief in respect of expenses which have been paid, both judicial and extra-judicial, can competently be made in separate proceedings from those to which the expenses relate (MacLaren, Expenses, page 20). The question therefore arises whether the appropriateness of an indemnity should be determined in the derivative proceedings or in the leave proceedings. It appears to us that in principle the latter is more appropriate. In the first place, the scope of an appropriate indemnity need not necessarily be confined to judicial expenses in the derivative proceedings. Since the parties to the leave proceedings are the shareholder and the company, it should be possible, ordinarily at least, for all issues arising in relation to the derivative proceedings to be determined, as between those parties, in the leave proceedings. It is in those proceedings, in particular, that an assessment can best be made of whether there has been a material change of circumstances since leave was granted, such that it has ceased to be reasonable that the derivative proceedings should be continued at the company's expense. The judge in the leave proceedings can discuss more freely the merits of the derivative proceedings while those proceedings are ongoing, and can take into account matters, such as an offer in settlement, to which the judge in the derivative proceedings could only have regard after those proceedings had been concluded. It is also possible to conceive of circumstances in which it might be appropriate to make an order in relation to an indemnity which was not related to any award of expenses, or any specific procedural step, in the derivative proceedings: the shareholder might, for example, run out of funds and require to be indemnified in order to continue (as in Wallersteiner v Moir (No.2) and McDonald v Horn).

[63] In principle, therefore, we accept that the court can competently order the company to indemnify the shareholder in respect of expenses incurred by him, or awarded against him, in the derivative proceedings. We also accept that such an order can competently be made in the leave proceedings. The court's jurisdiction to make such an order derives from its inherent jurisdiction to deal with expenses, and is an extension, to the case of a shareholder bringing derivative proceedings, of a principle which is already well established in relation to other persons bringing proceedings in what might be described as a representative capacity. The flexibility of petition procedure, and of the court's jurisdiction to deal with expenses, appear to us to be adequate to accommodate such orders.

[64] The question which has occasioned us greater difficulty is whether the court can competently make such an order in respect of expenses which have yet to be incurred. In the Law Commission report, as we have mentioned, it was recommended that the court should be given a statutory power to make an order in the derivative proceedings for an indemnity "in respect of expenses incurred, or to be incurred" in relation to those proceedings; a recommendation which was not implemented. We have already quoted the relevant paragraph of the report (Appendix D, paragraph 71). In that passage, the Scottish Law Commission recognised that it was "only right" that the court should have power to grant an application for an indemnity. The problem which concerned the Commission was that the court could not grant such an application in the derivative proceedings without a statutory power to do so, since "the court does not have a common law power to make an award of expenses against a person who is not a party to the cause" (the implicit assumption being that the company would not be a party to the derivative proceedings). Accordingly, the draft Bill appended to the report included a provision (clause 458B(8)) enabling the court to grant an application for an indemnity "in an action raised under this section", i.e. in the derivative proceedings. If, however, an application for an indemnity is made in the leave proceedings, the difficulty which concerned the Commission does not arise, since the company will be a party to any leave proceedings which are not refused in limine under section 266(3). There remains however the question as to the competency of a prospective order.

[65] One problem, in that regard, is that an enforceable order for payment of judicial expenses cannot be made under Scottish procedure until, first, the court has made a finding of liability for expenses, and secondly, the expenses have been taxed (unless they have been modified at a fixed amount). In the present case, the Lord Ordinary ordered in the first place that the Company "pays the petitioner's legal expenses incurred in respect of or connected with the said derivative proceedings on an agent client, client paying basis from today's date until the procedural hearing". That order cannot have been a decree for payment in a strict sense, since the expenses could not be taxed until the specified stage in the derivative proceedings had been reached. The order would appear to have been declaratory in effect: its meaning, in substance, appears to have been that the petitioner was entitled to be indemnified (or reimbursed) by the Company in respect of the legal expenses incurred up to the procedural hearing, as taxed. Once the procedural hearing was held, the petitioner could enrol a motion to have his account of expenses remitted for taxation, following which the court could grant decree for the payment of the taxed expenses.

[66] The Lord Ordinary also ordered that the Company "indemnifies the petitioner against all awards of expenses made against him in the said proceedings up until the said procedural hearing". That order has the appearance of an order ad factum praestandum, but may again be better understood as being declaratory in effect. It is not known whether any awards of expenses will be made, or what the taxed amount of any such expenses may be, or at what point in time any such amount may become payable. All that is said, in substance, is that the petitioner is entitled to be relieved by the Company of any liability in expenses, in the event that such a liability arises in the period up to the procedural hearing.

[67] If, then, the order is properly understood as declaratory of rights which have not yet become enforceable but whose existence is in dispute, such an order would appear to us to be competent in principle. Although it is not ordinarily competent to seek an order of a declaratory nature in a petition process, the rationale is that declarator ordinarily presupposes the pre-existence of some right in the applicant which the other party has denied or infringed; and the appropriate form of procedure for seeking the vindication of a pre-existing right is ordinarily by summons. The present situation is however different, in that a finding that the shareholder is entitled to be indemnified in respect of his expenses is not declaratory of any pre-existing right but is, rather, consequential upon, and ancillary to, the grant of leave to bring the derivative proceedings.

[68] If a finding is to be made, at the stage when leave is granted, as to the shareholder's entitlement to be indemnified in respect of liabilities and expenses which may be incurred in the future, the terms in which the finding is made should reflect the fact that there is a limit to the extent to which the court can assess, in advance, the reasonableness of his having incurred any particular liability or expense, and therefore the appropriateness of an indemnity. The dangers of the court's writing a blank cheque for the shareholder as to the amount of expenses which he can incur in the derivative proceedings are obvious. That has a number of implications. First, the court must be satisfied that it is necessary for such an order to be made prospectively, rather than the shareholder's entitlement to indemnification being considered after the expenses have been incurred. We do not however doubt that there may in appropriate cases be compelling reasons for finding the member entitled to be indemnified at the stage when leave is granted: in particular, as Buckley LJ explained in Wallersteiner v Moir (No.2) at page 399, minority shareholders may require the assurance of a prospective order so that they are not deterred from bringing derivative proceedings, where such proceedings ought to be brought, by the risk of incurring not only their own expenses but also a liability for the expenses of the defenders. Secondly, in cases where a prospective finding is appropriate, it makes sense for such findings to be made on a staged basis: that is to say, a finding can be made in respect of liabilities and expenses incurred up to a specified stage in the derivative proceedings, reserving leave to the shareholder to apply in the leave proceedings for a further finding once that stage has been reached. The appropriate stages will depend upon the circumstances, including the nature of the procedure which is anticipated in the derivative proceedings. In the present case, having regard to the fact that the derivative proceedings were to take the form of a commercial action in the Court of Session, the Lord Ordinary considered that the appropriate first stage was to the procedural hearing held under Rule of Court 47.12. The only realistic alternative would have been the preliminary hearing which is held following the lodging of defences. In the present case, the likely content of the defences can be anticipated from the answers to the petition and the supporting affidavits. Procedure between the preliminary hearing and the procedural hearing is under the management of the court. It is at the procedural hearing, following the recovery of documents and the adjustment of pleadings, that the court will have a better prospect of assessing how the case lies. In these circumstances, the selection of the procedural hearing as the end of the first stage was a matter within the reasonable exercise of the Lord Ordinary's discretion, subject to a third point which arises from the limits of the court's foresight. Although it may be desirable that the member should be able to embark on the derivative proceedings in the confident expectation that he will be indemnified against outlays and liabilities which have been reasonably incurred, the court cannot definitively prejudge the question whether all his future outlays and liabilities have been so incurred. A reasonable offer in settlement, for example, might be made at any time, rendering the further prosecution of the derivative proceedings unreasonable. Even if leave were granted on a staged basis, the possibility of a material change of circumstances occurring during the intervening period could not be excluded. For these reasons, it appears to us that a prospective finding that the shareholder is entitled to be indemnified should not be unconditional, but should reserve leave to the company to apply for the finding to be modified in the event of a material change of circumstances.

[69] It follows from the foregoing that, although criticisms can be made of the terms in which the order made by the Lord Ordinary was expressed, the respondents' fundamental challenge to the competency of an order of the nature we have explained must be rejected. It remains to consider the appropriateness of such an order in the circumstances of the present case, bearing in mind that, once it is accepted that the Lord Ordinary had jurisdiction to make a prospective finding that the petitioner was entitled to be indemnified, this court can interfere with the exercise of his discretion only on limited grounds. In that regard, the argument which was presented to us (but not to the Lord Ordinary) was that it was inequitable that a shareholder who owned 40 per cent of the share capital of a small company should be allowed to bring proceedings against the other principal shareholder (who, with his wife, owned the remaining 60 per cent) at the expense of the company: even if the petitioner was unsuccessful in the derivative proceedings, Mr Black and his wife would effectively pay 60 per cent of the petitioner's expenses. We note that a similar argument was rejected in Jaybird Group Ltd v Greenwood. Reliance was however placed on Halle v Trax BW Ltd [2000] BCC 1020, where Sir Richard Scott V-C dismissed an appeal against a decision refusing to grant a costs indemnity. The Vice-Chancellor did so in the light of the unusual facts of that case, noting (at page 1023) that the critical feature of the case was the relationship in the company of its two shareholders, each of whom owned 50 per cent of the shares, and one of whom wished to bring a derivative claim alleging wrongdoing by the other. As the Vice-Chancellor observed, the claimant was not a minority shareholder and the alleged wrongdoer was not in control of the company: the action was treated as being essentially a dispute between two partners. The respondents also founded on an obiter dictum in the case of Mumbray v Lapper [2005] BCC 990, where the facts were similar to those of the Halle case. It was acknowledged that the facts of the present case were of a less extreme character.

[70] So far as the English decisions are concerned, we note that in Mumbray v Lapper the court refused permission to continue the derivative claim, on the basis that more appropriate alternative remedies were available under section 459 of the Companies Act 1985 (i.e. unfair prejudice) or in the form of a winding-up on the just and equitable ground. In relation to the Halle case, it appears from the later case of Qayoumi v Oakhouse Property Holdings plc [2003] 1 BCLC 352 that there may be a question, as counsel for the petitioner submitted, as to the correctness of remarks made by the Vice-Chancellor to the effect that the claimant in the derivative claim would be protected by a lien over sums recovered by the company; and it may be, as counsel submitted, that no directly equivalent right would exist in any event under Scots law. The Vice-Chancellor's decision did not however turn on the existence of a lien, but on what he perceived as the unfairness that, should the action fail, the claimant's quasi-partner would be left to bear, via the company, half of the costs of the action.

[71] As we have explained, the rationale of indemnification in respect of the expenses of litigation, as between trustees and the trust estate, or other fiduciaries and those on whose behalf they are acting, is that the party who has incurred the expense has not been acting for his own benefit but for the benefit of the estate or person in question. A minority shareholder who brings derivative proceedings on behalf of the company is ordinarily entitled to indemnification because the same rationale applies. We can understand that, on the facts of cases such as Mumbray or Halle, the view may be taken that derivative proceedings are inappropriate, on the basis that the shareholder is in substance acting for his own benefit rather than for the benefit of the company and should therefore pursue an alternative remedy. Where however the court has decided that a shareholder should be allowed to bring proceedings in the interests of the company and on its behalf, it appears to us to follow that the shareholder is in principle entitled to be indemnified by the company in respect of his expenses and liabilities (subject to the qualifications which we have previously mentioned), and that his personal interest in the outcome, as a shareholder, is not a good reason for denying him that indemnity.

Conclusion

[72] Although we are of the opinion that the Lord Ordinary's approach to the granting of leave to raise derivative proceedings was in some respects erroneous, on considering the matter ourselves we have come to the same conclusion, namely that leave should be granted. We are not persuaded that we should interfere with the Lord Ordinary's assessment that a prospective finding of entitlement to indemnification is also appropriate. For the reasons which we have explained, however, we shall substitute a finding which is more clearly of a declaratory nature and which reserves to the Company the right to apply for the modification of the finding, prior to the procedural hearing, in the event of a material change of circumstances. We shall accordingly recall the Lord Ordinary's interlocutor and make an order in the following terms:

"(1) grant leave to the petitioner to raise the derivative proceedings;

(2) find that the Company is liable

(i) to pay all legal expenses incurred by the petitioner in respect of or in connection with the said derivative proceedings, on an agent and client, client paying basis, so far as those expenses are incurred from today's date until the procedural hearing in the said proceedings, and

(ii) to indemnify the petitioner against all awards of expenses made against him in the said proceedings up until the said hearing,

unless and to the extent that the court otherwise orders, on an application made by the Company in this petition prior to the said hearing; reserving to the Company the right to apply in this petition for an order as aforesaid in the event of a material change in circumstances;

(3) reserve to the petitioner the right to apply in this petition for a similar order in respect of subsequent stages of the derivative proceedings, and

(4) continue the cause in respect of all questions of expenses, including, for the avoidance of doubt, any further application which may be made in terms of paragraphs (2) or (3) above".