Broadcasting Investment Group Ltd v Mr Adam Smith
| Jurisdiction | England & Wales |
| Judge | Lady Justice Asplin,Lord Justice Coulson,Lord Justice Arnold |
| Judgment Date | 18 June 2021 |
| Neutral Citation | [2021] EWCA Civ 912 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2020/1723 |
| Date | 18 June 2021 |
[2021] EWCA Civ 912
Lady Justice Asplin
Lord Justice Coulson
and
Lord Justice Arnold
Case No: A3/2020/1723
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(Chancery Division)
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
Mr Andrew Simmonds QC
(Sitting as a Deputy High Court Judge)
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Dan McCourt Fritz (instructed by Withers LLP) for the Appellants
Mr Joseph Sullivan and Ms Maya Chilaeva (instructed by Gowling WLG (UK) LLP) for the Respondents
Hearing date: 25 th May 2021
Approved Judgment
This appeal and the cross-appeal are concerned with the scope and effect of the rule in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (“ Prudential”) as recently explained by the Supreme Court in Sevilleja v Marex Financial Limited [2020] 3 WLR 255. In particular, they are concerned with the effect of the rule in Prudential when taken together with the Contract (Rights of Third Parties) Act 1999 (the “1999 Act”), in respect of a contract that benefits a company, but to which the company is not a party. These appeals also concern: the extent to which the rule in Prudential applies where a shareholder seeks specific performance (and/or damages in lieu of specific performance) in respect of a breach of contract to which it is a party, where the company in which the shareholding is held also has a cause of action; and the application of the rule in Prudential, if any, to shareholders in corporate shareholders of the company which has a cause of action.
These issues arise in the context of an application by the Respondent, Mr Adam Smith, to strike out certain claims made against him by the Appellant, Broadcasting Investment Group Limited (“BIG”), Visual Investment International Limited (“VIIL”) and Mr Kenneth Burgess (together referred to as the “Claimants”) pursuant to CPR 3.4, or alternatively, for reverse summary judgment under CPR 24.2. Mr Burgess is the majority shareholder of VIIL which in turn owns 51% of the issued share capital of BIG.
In summary, the Claimants seek to enforce an alleged oral agreement made in October 2012 between BIG, Mr Burgess, Mr Smith and the second defendant, Mr Dan Finch, amongst others, for the transfer of shares in two broadcasting technology companies to a joint venture vehicle, the fifth defendant, Streaming Investments PLC (“SS Plc”) in which Mr Smith, Mr Finch, BIG and one other investor became shareholders (the “Agreement”). SS Plc is in creditors' voluntary liquidation and took no part either in the hearing before the judge or in the appeals before us.
The strike out/summary judgment applications were heard by Andrew Simmonds QC, sitting as a deputy High Court judge. In summary, he held (insofar as relevant to these appeals) that BIG's claims to enforce the Agreement, including both its claims for damages and specific performance, should be struck out. He held that the claims were barred by the rule in Prudential, on the basis that SS Plc, in which BIG owned shares, itself had a right to enforce the Agreement under the 1999 Act. However, the Judge declined to strike out Mr Burgess' equivalent claim. The citation of his judgment is [2020] EWHC 2501 (Ch).
The deputy judge gave permission to appeal in relation to the Appellants' first ground of appeal, concerning the relationship between section 4 of the 1999 Act and the rule in Prudential. Permission was granted subsequently by Newey LJ in relation to their second ground, concerning whether the rule in Prudential barred a claim for specific performance.
In his Respondents' Notice, Mr Smith seeks to uphold paragraph 1 of the deputy judge's order (pursuant to which BIG's claims were struck out) on the different or additional ground that BIG's contractual claims engage the rule in Prudential because, on the facts as assumed by the deputy judge, SS Plc would have had a claim against him for breaching his fiduciary duties as its director.
Mr Smith also cross-appeals the deputy judge's refusal to strike out the claims by Mr Burgess in respect of the Agreement and was given permission to do so by Newey LJ. In his cross-appeal, Mr Smith contends that because Mr Burgess owns shares in BIG, which in turn holds shares in SS Plc, the rule in Prudential bars Mr Burgess' claims in contract. He submits that the rule applies not only to claims brought by the direct shareholders in a company, but also to claims brought by those further up the shareholding chain. This has been referred to as the “Russian doll” argument or effect.
Background in more detail
I take the relevant background to this matter from the judgment. Reference should be made to the judgment itself for a full explanation of the facts. The account contained in the judgment was taken, in turn, from the Amended Particulars of Claim, the contents of which were treated as factually correct for the purposes of the applications before the deputy judge. It was made clear in the judgment that were the claims to proceed, many of the allegations in the pleading would be contested. The position remains the same before us.
The background is complicated but is necessary to understand the issues before us. Mr Burgess says that he was introduced to Mr Smith in February 2012. Mr Smith was associated with a company named Simplestream Ltd (“SS Ltd”). Its directors were Mr Smith and Mr Finch. It is said that Mr Smith told Mr Burgess that SS Ltd could develop software which Mr Burgess required but that the company required investment. As a result, Mr Burgess and/or VIIL were invited to invest in SS Ltd. Mr Burgess told Mr Smith that he/VIIL would not themselves invest in SS Ltd but that outside investors, being a Mr Goddard and a Mr Macpherson and companies associated with them, would be introduced.
SS Ltd was owned as to 80% by a Ms Cynthia Franklin and as to 20% by Mr Smith. Another company, TV Player Ltd (“TVP”), was said to be owned as to 75% by Ms Franklin, as to 20% by Mr Smith and as to 5% by Mr Finch. Mr Burgess says that in August 2012, Mr Smith told him about a dispute between himself and Ms Franklin which had been resolved by an agreement providing for the transfer of all Ms Franklin's shares in SS Ltd and TVP to Mr Smith, giving Mr Smith total, or nearly total, control of the two companies.
It is pleaded that in about October 2012 Mr Burgess and Mr Smith agreed that BIG, as the vehicle of VIIL and ViiomniTV Limited (an investment vehicle of Mr Goddard and Mr McPherson, “Vii”), should be entitled to 39% of the equity in a company to be called Simplestream Group on the basis that it would become the holding company for SS Ltd and TVP. BIG was incorporated on 15 October 2012 and its shares were held as to 51% by VIIL (which in turn was controlled by Mr Burgess) and as to 49% by Skoosh Investments Ltd (“Skoosh”) (at one time, the Fourth Defendant), another Goddard/Macpherson investment vehicle.
Later that month, at a meeting on 30 October 2012, it is alleged that the Agreement was entered into by BIG (acting by Mr Burgess), Mr Burgess, Mr Smith, Mr Finch and two companies acting by Mr Macpherson, Skoosh and Vii. Insofar as relevant to this appeal, the features of the Agreement were as follows. First, Mr Smith would procure the incorporation of the Simplestream Group holding company, and its shares would be held by the participants as follows: 39% by BIG, 48% by Mr Smith, 5% by Mr Finch and 8% by a company to be nominated by Mr Macpherson. Second, once a loan of £150,000 made by BIG to SS Ltd had been repaid, BIG would transfer the loan to the holding company in order to capitalise it (the “Capitalisation Condition”). Third, Mr Smith would, within a reasonable time of the fulfilment of the Capitalisation Condition, procure the transfer of SS Ltd and TVP, the operating subsidiaries, to the Simplestream Group holding company.
The Claimants allege that both BIG and Mr Burgess personally were parties to, and therefore, entitled to enforce the Agreement. The Simplestream Group holding company, however, was not in existence at the date of the Agreement and therefore could not be a party to it.
It is pleaded that the following steps were taken to give effect to the Agreement. On 20 November 2012, the holding company was incorporated, with its shares allocated as set out above. This company is the Fifth Defendant, SS Plc which was originally named Simplestream Group Plc. On 12 February 2013, BIG fulfilled the Capitalisation Condition. The Claimants allege, however, that in breach of the Agreement, the shares in SS Ltd and TVP were never transferred.
On 4 August 2015, SS Plc went into creditors' voluntary liquidation. The Liquidator has, thus far, declined to pursue any claims which SS Plc may have in relation to the Agreement.
In their Amended Particulars of Claim, the Claimants plead that by reason of the breach of the Agreement:
“32. … BIG has suffered loss by reason of the consequent diminution in the value of its shareholding in SS PLC and loss of dividend income from SS PLC. Further, it was a foreseeable consequence of the aforesaid breaches that (by reason of lacking the revenues they would have supplied) SS PLC subsequently entered insolvent liquidation, such that BIG's shares in SS PLC lost the entirety of their...
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