Boston Trust Company Ltd v Szerelmey Ltd
| Jurisdiction | England & Wales |
| Judge | Charles Morrison |
| Judgment Date | 13 November 2020 |
| Neutral Citation | [2020] EWHC 3042 (Ch) |
| Date | 13 November 2020 |
| Docket Number | Case No: BL-2019-001698 |
| Court | Chancery Division |
[2020] EWHC 3042 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
CHANCERY DIVISION
Royal Courts of Justice
Rolls Building, Fetter Lane, London, EC4A 1NL
Charles Morrison
(sitting as a Deputy Judge of the High Court)
Case No: BL-2019-001698
Anna Dilnot (instructed by Osborne Clarke LLP) for the Claimants
Stuart Adair (instructed by Brachers LLP for the 1 st – 3 rd Defendants)
Timothy Carlisle (instructed by Woodroffes Solicitors) for the 5 th Defendant
Ulick Staunton (instructed by Thompson Snell and Passmore LLP) for the 6 th Defendant
Hearing date: 4 November 2020
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Charles Morrison (sitting as a Deputy Judge of the High Court):
Introduction
This is a matter which, as I will explain in some detail shortly, has already this year occupied the time of this court on a number of occasions but which comes before me now on the Claimants' (the Cs') application for the costs of those earlier proceedings and also for an indemnity from the first to third Defendants (the Companies) in regard to the costs to be incurred in the action.
The Cs are the trustees of an Isle of Man discretionary trust, the Erutuf Trust, and also the shareholders in the fourth Defendant ( Tellisford). Tellisford is an indirect parent company of the first to third Defendants, whom I was told operate a group of companies well known in the field of conservation and heritage stone masonry.
The proceedings are brought by the Cs by way of what is known as a derivative action. This is because the claims lie in the hands of the Companies however it is the Cs that want to prosecute them, albeit for the benefit of the Companies. This action is brought at common law rather than under the relevant procedure for derivative actions laid down by the Companies Act 2006, for the reason that this is a multiple derivative action, that is to say, the Cs are not shareholders in the companies said to have the causes of action at their hands but rather they are (albeit through a number of intermediate holding companies) members of the company (i.e. Tellisford) that is itself a shareholder in those subsidiaries (the Companies). The proceedings aim at reinstating misappropriated assets to the Companies. The Cs allege that the fifth Defendant ( Mr Verhoef), a director and indirect majority shareholder of the Companies, was responsible for the wrongdoing, acting to some extent in concert with the seventh to tenth Defendants.
The progress of derivative actions is subject to the superintendence of the court (see CPR 19.9). So it was that pursuant to the prescribed procedure the matter came before Mr Stephen Houseman QC, sitting as a Deputy Judge of the High Court, in April and May of this year when he heard and decided the second stage “permission to proceed” application. Broadly speaking, by way of his first May judgment, the Deputy Judge decided that there were good grounds for permission to be granted; and by way of his second May judgment, following the May hearing, he took the view that the permission could be granted on a conditional basis.
The permission granted under CPR 19.9(4) was conditional only, because, as will become clear in this judgment, the Deputy Judge found that the Cs did not have the requisite standing to bring the derivative claim but that the position was capable of remedy. Indeed, this remedy was seen as both proximate and probable. As the Deputy Judge himself appreciated however, his decision had a novelty to it that suggested scrutiny by an appellate tribunal was desirable. I was told that Mr Verhoef's appeal in respect of the permission decision is now listed to be heard in the Court of Appeal in April 2021.
At paragraph 101 of his second May judgment the Deputy Judge said this:
“ In light of this conclusion, I adjourn the Costs Indemnity Application to the October Hearing. I reserve the costs of the Permission Application, including these consequential matters, to the judge who conducts the October Hearing — observing that some form of split result on costs appears to be just and reasonable even if Boston obtain standing to take this derivative claim forward. I also adjourn or reserve to the October Hearing the question of any (further) extension to the validity of the claim form (as may be amended in the meantime) pursuant to CPR 7.6, because I am not persuaded that it is appropriate to extend validity at this stage.”
Adding only that the difficulty in respect of standing has now been resolved as the Deputy Judge expected, and that the suggestion of amending the draft Claim Form (which in accordance with the CPR 19 procedure has still not been served) was not, doubtless for good procedural reason, pressed before me, it is against the background I have explained that I am now asked to decide the question of who should bear the costs of the proceedings before Mr Houseman QC; and also whether it is right that the Companies should bear the costs of the Cs as they proceed with the task of bringing the derivative claim to trial and determination by the court.
The Facts
Although the facts are set out in some detail in the two judgments of Mr Houseman QC to which I have already referred, it is necessary for the purposes of this judgment for me to give a short account of what lies behind the Cs' allegations. The proceedings concern the Szerelmey group of companies ( Szerelmey Group). The Szerelmey Group (engaged as I have already noted, in the business of stone restoration and repair) is the joint enterprise of Mr Verhoef and Mr Earl Krause (the settlor of the Erutuf Trust) who have it seems been in business together since the 1960s.
It seems that as they neared retirement and issues of succession arose, the longstanding relationship between Mr Krause and Mr Verhoef broke down. It is alleged, amongst other claims, that Mr Verhoef excluded Mr Krause from the Szerelmey Group business by preventing him from receiving necessary information and by taking profits to which he was not entitled.
The ownership structure in respect of the Companies was described by Mr Houseman QC in his 7 May judgment at paragraphs 12/13 as follows:
“ Mr Verhoef and his family are beneficiaries under a New Zealand trust represented by VOC Trustee Limited (“ VOC”). Through that trust arrangement and his ownership of an English company called Warthog Investments Limited (“ WIL”), Mr Verhoef and his family effectively hold a majority of the voting rights in each of the Operating Companies. For convenience, I refer to this compendiously as the “ VOC/Verhoef” shareholding or stake.
The ultimate ownership proportion in respect of the Operating Companies is roughly 1:2 in favour of Mr Verhoef, namely: 33.33% (Erutuf/Krause) / 66.67% (VOC/Verhoef) in respect of the First Defendant (“ Szerelmey”) and Second Defendant (“ Szerelmey GB”); and 26.20% (Erutuf/Krause) / 58.22% (VOC/Verhoef) in respect of the Third Defendant (“ Szerelmey Restoration”).”
It was common ground before Mr Houseman QC, and it remains so, that as between ultimate principal stakeholders, Mr Verhoef is the majority owner of the Companies and has been at all material times.
In these proceedings, the Cs allege that Mr Verhoef has used the control he has over the Companies to procure, in breach of duty and for no or no adequate consideration, the transfer of certain monies and assets of the Companies to companies which he owns and controls which lie outside the Szerelmey Group. The case that is made is succinctly summarised by Mr Houseman QC at paragraphs 40–57 of his 7 May Judgment.
The essence of the claims made are that:
(a) substantial and unjustified consultancy fees totalling at least £1.2m have been paid to nominee companies of Mr Verhoef's (the ninth and tenth defendants in these proceedings) pursuant to sham invoices;
(b) ownership of Szerelmey's operational assets, trademarks and client lists have been sold to and leased back from the seventh defendant, with the primary aim of avoiding future claims from creditors;
(c) the profitable labour contracting part of the Szerelmey Group's business, has been transferred, absent any consideration, to another Mr Verhoef controlled company, that is to say the sixth defendant; and
(d) substantial unsecured loans have been advanced by the first defendant to companies controlled by Mr Verhoef otherwise than on a commercial basis and with uncertain prospects for repayment.
Procedural history
Because it is relevant to the argument over costs which I am asked to decide, it is necessary for me to recite in some further detail the history of the proceedings. The first stage permission to continue the derivative claims was granted ex parte by Charles Hollander QC, sitting as a Deputy Judge of the High Court, on 25 September 2019. The Cs also applied for a freezing order and proprietary injunction against Mr Verhoef, but that relief was...
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