Brian John Harris (Appellant in A3/2015/1253 Respondent in A3/2015/1227) v Microfusion 20032 LLP and Others and Others (Respondents in A3/2015/1253 Appellants in A3/2015/1227)
| Jurisdiction | England & Wales |
| Judge | Lord Justice McCombe,Lord Justice Christopher Clarke,Lord Justice Jackson |
| Judgment Date | 06 December 2016 |
| Neutral Citation | [2016] EWCA Civ 1212 |
| Docket Number | Case No: A3/2015/1253 AND A3/2015/1227 |
| Court | Court of Appeal (Civil Division) |
| Date | 06 December 2016 |
[2016] EWCA Civ 1212
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE,
CHANCERY DIVISION,
MANCHESTER DISTRICT REGISTRY,
HIS HONOUR JUDGE PELLING QC
(SITTING AS A DEPUTY JUDGE OF THE HIGH COURT)
[2015] EWHC 1116 (Ch)
A31MA061
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Jackson
Lord Justice McCombe
and
Lord Justice Christopher Clarke
Case No: A3/2015/1253 AND A3/2015/1227
Mark Harper QC (instructed by Gateley Plc) for the Appellant/Respondent, Mr Harris
Lesley Anderson QC (instructed by DLA Piper UK LLP) for the Second and Third Respondents/Appellants
Hearing date: 2 November 2016
Approved Judgment
Mr Brian Harris ("Mr Harris") is a member of the limited liability partnership Microfusion 2003–2 LLP ("the LLP"). He wishes to bring a derivative claim which he says would be for the benefit of the LLP against Future Films (Management Services) Limited and Future Films (Partnership Services) Limited (collectively "Future Films") in respect of what Mr Harris says were breaches of duty committed by those companies as "Designated Members" of the LLP to the detriment of the LLP. He alleges that the LLP is entitled to damages or equitable compensation from Future Films amounting to more than £5 million.
The intended claims arise under three heads. He applied to the High Court, pursuant to standard procedure, for permission to continue the claims against Future Films on the LLP's behalf. The application came before HH Judge Pelling QC, sitting as a judge of the High Court, on 24 March 2015 and by his judgment and order made on the following day, 25 March 2015, the judge granted permission to proceed with two of the intended claims but refused permission to proceed with a third. (The neutral citation for the judge's judgment is [2015] EWHC 1116 (Ch)).
Mr Harris appeals against the order refusing permission to continue the third claim and Future Films appeals against the grant of permission in respect of the other two grounds. The judge refused permission to appeal but permission was granted in respect of both appeals by Lewison LJ by orders of 21 May 2015.
Behind the issues arising in this litigation lies voluminous commercial documentation about which it is not necessary to give more than a very brief outline. The context is a film financing scheme into which wealthy individuals were invited to invest, primarily in order to obtain certain taxation advantages from investment in the British film industry. In this case, in common with similar schemes, investment was invited to enable production of a particular film, ultimately called "Chasing Liberty". There are 32 individual investor members of the LLP and the two Future Films companies, Future Films, who are parties to these appeals, are appointed as the "Designated Members" of the LLP.
Under the partnership deed (to the version of 28 November 2013 of which we were directed), clause 3.1 provides as follows:
"All matters relating to the management and conduct of the affairs of the Partnership and any agreement or approvals required by this Deed to be made or given by the Members shall be decided by a Member Majority save that, notwithstanding the foregoing, the Designated Members shall have sole authority to determine those matters which are stated in this Deed as requiring only their approval, consent or determination (as the case may be). In addition to the foregoing, the Designated Members shall have full power and authority to carry out the duties referred to in clause 9.5 and (on their own behalf and so as to bind the Partnership thereby) execute any deed or document or do any other act or thing which the Members may direct the Partnership to execute or do under the provisions of this clause 3 or any other provision of this Deed".
(Clause 9.5 concerns duties of registration with the Registrar of Companies and does not concern us.) Clause (A)(1) of the introductory provisions contains definitions. It defines "Member Majority" as,
"the prior written consent of the Designated Members and those Investors who hold more than 75% of Total Investments".
Any decision to bring or conduct litigation on behalf of the LLP, therefore, is subject to the veto of Future Films as the Designated Members. Mr Harris says in evidence that he has the support of 25 individual members for the claims that he now wishes to make. Naturally enough, he does not have the support of Future Films. Hence the application for permission to bring a derivative action.
The draft Particulars of Claim presented to the judge alleges that Future Films had and have control over the day to day management of the LLP and that they owed and owe fiduciary duties which were particularised in paragraph 4 of the draft as follows (in the draft the LLP is called "the C" and Future Films "the Ds"):
"The Ds and each of them owed the following fiduciary/statutory duties to the claimant namely to:
(i) act within the powers delegated to them;
(ii) promote the success and/or to act in the best interests of the C;
(iii) exercise reasonable care, skill and diligence;
(iv) avoid a situation in which it has or could have a direct/indirect interest that conflicts with or possibly may conflict with the interests of the C;
(v) declare an interest in any proposed transaction involving the C;
(vi) disclose to the claimant any wrongdoing on its part or the part of others in the course of its (their) performance of its (their) role on behalf of the claimant."
The allegation is that Future Films committed breaches of these obligations in respect of three matters. These have been called in the proceedings "the LMI fee issue", "the Alcon fee issue" and "the rebate of minimum guaranteed amount issue". The judge granted permission to proceed with the second and third of these claims, but not the first.
Taking the LMI fee issue first, here it is alleged that LM Investments Limited (i.e. "LMI"), a company owned by the same person(s) who controlled the promotion of the film, had the apparent role of carrying through various parts of the film financing scheme. It is alleged that, at the instigation of Future Films, it received a fee from the LLP of £3.39 million for its general administrative services. The promotional literature had said that,
"LMI, in its capacity as Film Consultant, will charge the Partnership fees of approximately 8% of the Capital Contributions to the Partnership…The precise sums charged will depend on the specifics of each Film and will be advised to prospective members by LMI… ".
In contrast, it is alleged that the fees actually paid represented 15% of the contributions rather than 8%. This gives rise to the following allegation in the draft pleading:
"3(a) The Ds have not either at the time or subsequently provided any explanation as to why it was in the interests of the C to agree to, and/or pay the LMI fee, and/or a fee in excess of that referred to in para.7(2) above.
(b) The Ds did not disclose to the C that they were in a position or actual or perceived conflict in view of the 'connection' between the Ds and LMI …
(c) The Ds proceeded to agree and/or pay the LMI fee despite having failed to make the disclosure referred to in (b) above.
(d) The Ds did not seek or obtain the consent, informed or otherwise, of the members of the C paying the LMI fee and/or a fee in excess of that referred to in para.7.2 above.
(e) The Ds subsequently failed to disclose their conduct in relation to the agreement and/or payment of the LMI fee."
Consequently, the following is alleged in paragraph 8 of the draft:
"In these circumstances the Ds, and each of them, have breached the duties pleaded in para.4 above and/or clause 3.1 of the deed of partnership.
As a result of the matters aforesaid the claimant has suffered loss and damage in the sum of £1.582.073.72, being the difference between the LMI fee and the fee referred to para.7.2 above …"
The second issue, the Alcon fee issue, arises out of Future Films being said to have procured the payment by the LLP of a fee of £2.5 million to Alcon Entertainment LLC for marketing services. It is alleged that there was no good commercial reason for the LLP to pay for such services, as it contracted for the provision of the same services by a company called Daughter Productions LLC ("DPL") on the same day. It is alleged that the purposes of the arrangements with Alcon was explained in various different ways by the individual controlling Future Films. In an e-mail of 4 August 2003 the fee was (it is said) broken down into three parts, "an EP fee", "a financing fee" and "commission". It is said that HM Revenue and Customs rejected this explanation, saying that Alcon was the real maker of the film and the fee was not for better performance but part of the costs of the production arrangements. In the circumstances, it is alleged in the draft pleading that the payment was a breach of fiduciary duty as follows:
"15. Further, in view of the facts and matters pleaded in paragraph 12 above, the C cannot see on what basis the Ds (or either of them) can have honestly believed that Alcon was entitled to the Alcon Fee pursuant to the Marketing Services Letter."
The third matter of which complaint is made is the "rebate of minimum guaranteed amount issue". In this case it is said that the LLP entered into two agreements on 30...
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