Alexander Marshall Wishart For An Order Under S.266 Of The Companies Act 2006 Granting Leave To Raise A Derivative Proceeding
| Jurisdiction | Scotland |
| Judge | Lord Glennie |
| Neutral Citation | [2009] CSOH 20 |
| Date | 12 February 2009 |
| Docket Number | P385/08 |
| Court | Court of Session |
| Published date | 12 February 2009 |
| OUTER HOUSE, COURT OF SESSION [2009] CSOH 20 | |
| P385/08 | OPINION OF LORD GLENNIE in the Petition of ALEXANDER MARSHALL WISHART Petitioner; for An order under s.266 of the Companies Act 2006 granting leave to raise a derivative proceeding |
Petitioner: Barne, Tods Murray LLP
Respondents: Motion, solicitor advocate, bto
12 February 2009
Introduction
[1] This is a petition for an order under s.266 of the Companies Act 2006 ("the 2006 Act") granting the petitioner leave to raise derivative proceedings against John McLeod Black (otherwise known as "Ian Black") and SJB Developments Ltd. ("SJB").
[2] The petitioner is the owner of 40% of the shares in Castlecroft Securities Limited ("the Company"). The remaining shares are held by Mr Black (40%) and his wife Sheena (20%). The petitioner and Mr Black are stepbrothers. The Company was incorporated in 1984. Its business includes buying and leasing commercial property. The petitioner and Mr and Mrs Black are directors of the Company, together with a Ms Smith. The petitioner claims that he was not involved in the day to day management of the Company's commercial property activities, but this is disputed.
[3] The petitioner avers, in summary, that in early 2004 the Company identified three sites suitable for acquisition and leasing by the Company as part of its business; that in about March 2004, without his knowledge, Mr Black entered into a joint venture agreement with another property developer in Dundee, a Mr Linton, for the acquisition and development of the three properties; that together they formed a new company, SJB, for this purpose; and that in April 2004 SJB bought two of the sites and leased the third with an option to purchase. He goes on to aver that SJB, with the assistance of employees of the Company, subdivided the properties into office accommodation and leased out the units, thereby making a substantial profit, which profit, he avers, would have accrued instead to the Company had the business opportunity not been diverted from it to SJB. He says that, when taxed with having diverted the Company's business to SJB, Mr Black gave a false excuse about the Company's regular bankers being unwilling to fund the purchase of the properties. He contends that, in diverting the Company's business to SJB, Mr Black acted in breach of fiduciary duty owed by him 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 unlawful diversion of the Company's business. I should make it plain that Mr Black denies any wrongdoing. Although he accepts that he formed a joint venture with Mr Linton, which became SJB, and that SJB purchased or leased the properties and let them out at a profit, he says that this occurred in circumstances where the bank had refused to make any further loans to the Company and that there was, therefore, no question of him or SJB either taking or profiting from business that the Company would otherwise have had. He also says that the petitioner was well aware of the circumstances of SJB's purchase of the properties, but made no complaint until some time had passed.
[4] The petitioner has asked the Company to investigate and pursue claims against Mr Black and SJB in respect of the above. The Company has refused to do so. The petitioner avers that Mr Black has consistently blocked his attempts to have the matter put in the hands of solicitors and in this he has been assisted 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. To do this he needs the leave of the court under s.266 of the 2006 Act. He has petitioned the court for leave to commence such proceedings. The Company is a respondent to the petition, as also are Mr Black and SJB. Answers have been lodged and both the petition and answers have been adjusted.
Derivative proceedings before the 2006 Act
[5] Before looking at the relevant provisions of the 2006 Act, I should digress slightly (under reference to certain of the authorities laid before me) to put those provisions and the issues arising therefrom in some sort of context.
[6] The derivative action developed in England as an exception to the rule in Foss v. Harbottle 2 Hare 461 to the effect that a shareholder could not sue in respect of a wrong done to a company. Generally the pursuer in the action had to be the company. The exception to the rule was first spelled out in cases where a fraud on the company was committed by one or more directors who were then able to use their power to prevent the company bringing proceedings against them. In such cases the minority shareholder or shareholders were allowed to sue on behalf of the company. The exception was expanded to cover cases of "equitable fraud", the term used in Gore-Brown on Companies at para.18[7]-[12], e.g. where directors benefited themselves in breach of fiduciary duty. The history is set out by Templeman J in Daniels v. Daniels [1978] Ch. 406. He summarises the principle in this way (at p.414):
"The principle which may be gleaned [from the cases] is that a minority shareholder who has no other remedy may sue where directors use their powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company."
One example which he gives, citing Cook v. Deeks [1916] 1 AC 554, is the case of directors diverting business in their own favour, the sort of conduct alleged in the current action. The rationale for allowing the aggrieved minority to bring an action on behalf of themselves and other shareholders when the wrongdoers are in control of the company is obvious: "if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue": see Prudential Assurance Co. Ltd. v. Newman Industries Ltd. [1982] 1 Ch. 204, 211, referring to the judgment of Jenkins LJ in Edwards v. Halliwell [1950] 2 All ER 1064.
[7] It is not necessary for present purposes to look more closely at the many cases in which the English courts have dealt with derivative actions, except to note certain procedural questions which arose in connection with such actions and the solutions worked out by the English courts. One of the problems underlying such an action is how the minority shareholder bringing the action should fund it. Should he have to fund the action out of his own pocket? And should he personally be liable in expenses to the other party if the action is unsuccessful? Unless some protection was given to the minority shareholder, he might be deterred from bringing such an action even in cases where it was clear that it was the appropriate course. The solution which found support in the Court of Appeal in Wallersteiner v. Moir (No.2) [1975] QB 373 was based on agency. Whatever the nuances of procedure, the minority shareholder was not really suing on his own behalf but on behalf of the company. In those circumstances, provided that he had reasonable grounds for bringing and continuing the action, he should, like any other agent, be indemnified by the company for his costs and expenses reasonably incurred in so doing. At page 391, Lord Denning MR put it in this way:
"Now that the principle is recognised, it has important consequences which have hitherto not been perceived. The first is that the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonably incurred by him in the course of the agency. This indemnity does not arise out of a contract expressed or implied, but it arises on the plainest principles of equity. It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris .... 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 its own costs even if the action fails. It is a well known maxim of the law that he who would take the benefit of adventure if it succeeds ought also to bear the burden if it fails. ... This indemnity should extend to his own costs taxed on a common fund basis.
In order to be entitled to this indemnity, the minority shareholder soon after issuing his writ should apply for the sanction of the court in somewhat the same way as a trustee does: ... In a derivative action, I would suggest this procedure: the minority shareholder should apply ex parte to the master for directions, supported by an opinion of counsel as to whether there is a reasonable case or not. The master may then, if he thinks fit, straightaway approve the continuance of the proceedings until close of pleadings, or until after discovery or until trial (rather as a legal aid committee does). The master need not, however, decide it ex parte. He can, if he thinks fit, require notice to be given to...
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