Boston Trust Company Ltd v Gordon Verhoef
| Jurisdiction | England & Wales |
| Judge | Lord Justice Warby,Sir David Richards,Lord Justice Henderson |
| Judgment Date | 28 July 2021 |
| Neutral Citation | [2021] EWCA Civ 1176 |
| Docket Number | Case No: A3/2020/1162 |
| Court | Court of Appeal (Civil Division) |
[2021] EWCA Civ 1176
Lord Justice Henderson
Lord Justice Warby
and
Sir David Richards
Case No: A3/2020/1162
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Stephen Houseman QC (sitting as a Deputy Judge of the High Court
[2020] EWHC 1136 (Ch) and [2020] EWHC 1352 (Ch)
Royal Courts of Justice
Strand, London, WC2A 2LL
Mark Tempest (instructed by Woodroffes Solicitors) for the Appellant
Anna Dilnot QC (instructed by Osborne Clarke) for the Respondents
Hearing dates: 28 April 2021
Approved Judgment
Introduction
This is an appeal against an order giving conditional permission to continue a derivative action.
The claimants issued the proceedings, on the basis that they were registered shareholders of the fourth defendant Tellisford Limited (Tellisford). They seek relief on behalf of three subsidiaries of Tellisford. After a full hearing of the permission application, Mr Stephen Houseman QC, sitting as a Deputy Judge of the High Court, held that it was a suitable case in which to give permission, save that the claimants were not registered shareholders and did not otherwise have standing to pursue the derivative claims. The claimants had issued proceedings for rectification of the register of members of Tellisford to show them as shareholders and it appeared to the judge that they had at least a good arguable case for rectification. In those circumstances, by an order dated 28 May 2020, he granted permission to continue the action, on the condition that the claimants became registered as shareholders of Tellisford, whether pursuant to their rectification claim or otherwise.
The judge gave the defendants permission to appeal, limited to whether the court had jurisdiction to grant conditional permission and, if so, whether he had been right to exercise his discretion to grant it. He observed that there was no prior authority for the grant of conditional permission (and we have been shown none) and both sides agreed that it was a suitable case for permission to appeal. The defendants' application for permission to appeal on other grounds was refused both by the judge and by Lewison LJ. The present appeal is brought by the fifth defendant, Gordon Verhoef (the appellant).
The significance of these issues in these proceedings is now much reduced because, by an order of the High Court made on 23 July 2020 (the rectification order), it was ordered that the register of members of Tellisford be rectified so as to record the claimants as the joint holders of 95 A ordinary shares from 3 June 2016 and 5 B ordinary shares from 9 October 2018.
The effect of this order is that the claimants are deemed to have been members of Tellisford for all purposes from the dates specified in the order: see Re Starlight Developers Ltd [2007] EWHC 1660 (Ch), [2007] BCC 929 ( Re Starlight) at [10], citing the decision of this court in Re Sussex Brick Company [1904] 1 Ch 598. It follows that, for all relevant legal purposes, the claimants are deemed to have been members of Tellisford, with standing to bring these proceedings, both when the present proceedings were issued in October 2019 and when the permission application was heard in April 2020.
Mr Tempest, appearing for Mr Verhoef, submitted that we should approach the appeal on the basis of the facts as they appeared at the date of the judge's order. In my judgment, this is not a legitimate approach for the court to adopt. In view of the legal effect of the rectification order, and the judge's conclusion that on all relevant grounds other than standing permission should be granted, it can now be seen that the proper order was the grant of unconditional permission.
The claimants submitted that the judge was right to make the conditional order and that it should remain in place. They fulfilled the condition imposed by the order by obtaining the rectification order, so since 23 July 2020 they have had unconditional permission. Mr Verhoef opposed this course.
We took the view at the hearing of the appeal that we should hear argument on the issues raised by the appeal, both because it raised an issue of principle with potential impacts beyond this case and because the judge's order for conditional permission should not remain in place if we were satisfied that it should not have been made.
Background
The first to third defendants (the operating companies) are trading subsidiaries of Tellisford, which is the holding company for a group carrying on a well-established stone restoration and repair business in the UK under the Szerelmey name. The ultimate controllers of the group are Mr Verhoef and Mr Earl Krause. They, together with Mr Verhoef's wife and Mr Krause's son, are the directors of Tellisford. The share capital of Tellisford comprises 190 A ordinary shares and 10 B ordinary shares. Family trusts established by Mr Verhoef and by Mr Krause each own 95 A ordinary shares. The B ordinary shares were owned by a Mr David Maughan but by a stock transfer form dated 9 October 2018 he transferred 5 shares to Mr Krause's trust.
Having worked closely together for some 60 years, the relationship between Mr Verhoef and Mr Krause broke down in late 2015/early 2016 and, as is common ground, Mr Verhoef excluded Mr Krause from participation in the business.
The proceedings
On 1 October 2019, the claimants in their capacities as trustees of Mr Krause's trust (the Erutuf trust) issued the present proceedings, claiming relief on behalf of the operating companies in respect of alleged misappropriations of assets of those companies. The claims are made against Mr Verhoef and five companies alleged to have assisted in the misappropriations or to have received the assets. It is unnecessary to go into the detail of the claims.
Prior to the issue of the proceedings, the claimants applied without notice for personal and proprietary freezing injunctions. They also applied at that stage, again without notice, for permission to continue the claim as a derivative claim. The injunctions were refused, but permission was granted pending a full hearing of the application.
Derivative claims
These are so-called double derivative claims or (where there are one or more intermediate holding companies, as is the case with one of the operating companies) multiple derivative claims, whereby members of a holding company bring proceedings to enforce claims, not on behalf of the company of which they are members, but on behalf of subsidiaries of that company.
They are not subject to the regime set out in Chapter 1 of Part 11 of the Companies Act 2006 (the statutory regime). This arises from the definition in section 260(1) of a “derivative claim” as proceedings “by a member of a company (a) in respect of a cause of action vested in the company, and (b) seeking relief on behalf of the company”. The definition of a “member” of a company is for these purposes extended from its general definition of a person who has agreed to become a member and whose name is entered in the company's register of members (section 112(2)) but only so as to include a person to whom shares have been transferred or transmitted by operation of law (section 260(5)(c)). The claim must therefore be made by a member of the company on whose behalf the claim is made, or by a person entitled to shares in that company by transfer or transmission.
The circumstances in which double and multiple derivative claims may be brought remain governed by the common law rules, known as the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461: Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551 ( Fort Gilkicker) and Abouraya v Sigmund [2014] EWHC 277 (Ch).
There was no requirement until relatively recently for a claimant to apply for permission to continue a derivative claim. The practice was for the defendants to apply to strike out a derivative claim if they considered that it did not fall within the exceptions to the rule in Foss v Harbottle. This ceased to be the practice when, with effect from 2 May 2000, CPR 19 was amended by the introduction of a new rule 19.9, which required the claimant in a derivative claim on behalf of a company, other incorporated body or trade union to apply to the court for permission to continue the claim after issue of the claim form.
CPR 19 was amended with effect from 1 October 2007, when the statutory regime came into force. CPR 19.9A and 19.9B deal with claims to which the statutory regime applies, while CPR 19.9 (re-drafted), 19.9C and 19.9D apply to other derivative claims.
It is common ground in the present case that the claimants were required to obtain permission to continue the proceedings after the issue of the claim form. I consider this to be correct but, unlike the judge, I do not think that this requirement arises, strictly speaking, under CPR 19.9.
CPR 19.9 applies to “a derivative claim” which is defined in 19.9(1)(a) as being brought “where a company, other body corporate or trade union is alleged to be entitled to claim a remedy, and a claim is made by a member of it for it to be given that remedy” (emphasis added). Just as those words in section 260 of the Companies Act 2006 have been construed as limiting the statutory regime to “single” derivative claims (see the authorities cited above) so, as it seems to me, the same result must follow in CPR 19.9....
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