Alexander Marshall Wishart V. Castlecroft Securities Limited And Others
| Jurisdiction | Scotland |
| Judge | Lord Nimmo Smith,Lord Reed,Sir David Edward |
| Date | 21 July 2009 |
| Docket Number | P385/08 |
| Court | Court of Session |
| Published date | 21 July 2009 |
| 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: _______ |
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...
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