Homes for England v Nick Sellman (Holdings) Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 21 April 2020 |
| Neutral Citation | [2020] EWHC 936 (Ch) |
| Date | 21 April 2020 |
| Docket Number | Case No: CH-2019-000215 |
| Court | Chancery Division |
[2020] EWHC 936 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
APPEALS (ChD)
On appeal from the County Court at Central London
His Honour Judge Saunders
7 Rolls Building
Fetter Lane
London, EC4 1NL
Mr Justice Zacaroli
Case No: CH-2019-000215
Roger Laville (instructed by Mike Rattenbury in house Solicitor) for the Appellant
Niraj Modha (instructed by Acuity Law) for the First Respondent
Hearing dates: 31 March 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.
Introduction
This is an application for permission to appeal, with the appeal to follow if permission is granted, in respect of an order of HHJ Saunders dated 11 July 2019. By that order, the judge gave permission under s.261(f) of the Companies Act 2006 (the “2006 Act”) for the claimant, Homes of England Limited (“HoE”), to continue a derivative action against the first defendant, Nick Sellman (Holdings) Limited (“Holdings”) on behalf of the second defendant, Bromham Road Development LLP (“BRD”), a limited liability partnership (“LLP”).
The principal question raised by this appeal is whether the test for continuing a derivative action against an LLP is that contained in s.263 of the 2006 Act or the test at common law.
Background
HoE and Holdings are each a 50% partner in BRD. BRD is the freehold owner of a property situated at 51 Bromham Road, Bedford (the “Property”).
The Property was originally financed with a loan from Wellesley Finance plc, secured by a charge over the Property. That loan expired on 14 January 2018. It was a term of the loan that if it was not repaid in full within 14 days of expiry, BRD would incur a charge amounting to 2% of the outstanding indebtedness.
BRD was also funded by way of a loan from HoE in the sum of £1.6 million.
HoE negotiated alternative financing with the Bank of London and Middle East plc which, on or before 22 January 2018, offered to advance BRD £7.5 million at an annual interest rate of 3.15%. On 22 January 2018 HoE emailed Holdings to request it execute the documentation to enable the refinancing to take place.
HoE contends that Holdings, in breach of duties of honesty and good faith owed to HoE and in breach of a duty to act in the best interests of BRD, declined to execute the refinancing documentation straight away, delaying doing so until 20 February 2018.
By reason of the delay, the amount required to redeem BRD's loan from Wellesley Finance plc had increased by £206,933.21, which included the 2% charge as a result of late repayment. HoE contends, as a result, the amount by which BRD's loan from HoE could be repaid was reduced by the same amount.
In its claim form issued on 5 May 2018 HoE claimed that sum (£206,933.21), together with certain consequential losses, as damages flowing from Holdings' breaches of duty.
In its defence, Holdings, among other things, averred that HoE was not legally entitled to claim the relevant losses, because they were suffered by BRD, not HoE, and that any damage suffered by HoE was irrecoverable as reflective loss.
In light of this defence, HoE sought, by an application dated 9 August 2018, to amend its claim, to include a derivative claim brought on behalf of BRD. It alleged that Holdings owed duties to promote the success of BRD and/or to act in its best interests, to avoid a conflict of interest and to exercise reasonable skill and care in any management function performed in relation to BRD. It contended that Holdings' failure to execute the refinancing documentation in a timely way was a breach of those duties, which caused BRD to suffer loss. Although the pleading is ambiguous, Mr Modha, who appeared for HoE, clarified that it was intended to identify the increase in the amount required to redeem the loan from Wellesley Finance plc as the loss suffered by BRD for the purposes of the derivative claim.
It is common ground that BRD is a “body corporate”: see s.1 of the Limited Liability Partnerships Act 2000. Accordingly, the procedure for seeking the court's permission to bring a derivative claim set out in CPR 19.9C applies. By CPR 19.9C(4), “the procedure for applications in relation to companies under section 261, 262 or 264 (as the case requires) of the [2006 Act] applies to the permission application as if the body corporate … were a company.”
Section 261 (which applies where a member of a company brings a claim derivatively on behalf of the company and seeks the permission of the court to continue it) is the relevant provision in this case, with “member of an LLP” substituted for “member of a company”. It provides for a two-stage procedure: first, to consider whether the application discloses a prima facie case and, second, to determine whether to give permission.
HoE's application came before HHJ Saunders on 21 February 2019. The judge joined BRD as second defendant and permitted the amendment, but adjourned the question of permission.
In written submissions served immediately prior to that hearing, Holdings referred to the two-stage process required by the 2006 Act and said that, at the second stage, the court must consider the factors set out in s.263 of the 2006 Act. That section is applicable “where a member of a company applies for permission” under section 261 or 262. By s.263(2), permission must be refused if the court is satisfied:-
“(a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim, or
(b) where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company, or
(c) where the cause of action arises from an act or omission that has already occurred, that the act or omission—
(i) was authorised by the company before it occurred, or
(ii) has been ratified by the company since it occurred.”
By s.263(3), in considering whether to give permission (or leave) the court must take into account, in particular:-
“(a) whether the member is acting in good faith in seeking to continue the claim;
(b) the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to continuing it;
(c) where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—
(i) authorised by the company before it occurs, or
(ii) ratified by the company after it occurs;
(d) where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company;
(e) whether the company has decided not to pursue the claim;
(f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company.”
At the adjourned hearing on 17 May 2019, it was common ground that in considering whether permission should be granted, the test was that set out in s.263 of the 2006 Act. In a reserved judgment dated 11 July 2019, the judge, applying that test, determined to grant permission.
Between the date of the adjourned hearing, and the formal hand-down of the judgment on 11 July 2019, Mr Laville, who appears on this appeal for Holdings, was instructed for the first time. He took a new point, namely that s.263 of the 2006 Act does not apply at all to an LLP, that the judge should have applied the common law test applicable to companies prior to the incorporation of the 2006 Act, and that on the facts HoE could not satisfy the common law test. He sought to persuade the judge to give permission to appeal on the basis of this new point. The judge refused to do so because the point was raised for the first time only after judgment had been given.
Grounds of appeal
Holdings does not take issue with the judge's exercise of discretion if he was correct to apply the test under s.263 of the 2006 Act. Its appeal is based solely on the new point raised with the judge on 11 July 2019.
Accordingly, the substantive issues that arise on this appeal are whether:
i) The judge was wrong to apply the test under s.263 of the 2006 Act and should instead have applied the test at common law; and
ii) Had the judge applied the common law test, would he have declined to grant permission?
In the face of HoE's objection to this new point being taken on appeal, Holdings advances the following arguments:
i) The new point having been raised before the judge on 11 July 2019, before his order was sealed, he ought to have reconsidered his own decision, pursuant to the “ Barrell” jurisdiction, after the decision in Re Barrell Enterprises [1973] 1 WLR 19; and
ii) In any event, this court should exercise its discretion to permit the new point to be taken for the first time on appeal.
I will first address the substantive point, before considering whether either the judge should have permitted, or this court should permit, the new point to be taken.
The test to be applied on an application for permission for a member of an LLP to continue a derivative action
Chapter 1 of Part 11 of the 2006 Act, in particular sections 260 to 264, applies to derivative actions in respect of companies.
The Limited Liability Partnerships Act 2000, s.15, permits regulations to be made, among other things, specifying...
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...that benefit need not be exclusively financial). I find support for that proposition in Homes of England Ltd v Sellman (Holdings) Ltd [2020] EWHC 936 (Ch) where Zacaroli J applied the following test at [46] (and it is clear from the context that his first question was concerned with reflec......