Jones and Jones and Others
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Mr Justice Douglas Brown,Lord Justice Rix |
| Judgment Date | 12 July 2002 |
| Neutral Citation | [2002] EWCA Civ 961 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2001/2445 CHANF |
| Date | 12 July 2002 |
[2002] EWCA Civ 961
Lord Justice Rix
Lady Justice Arden and
Mr Justice Douglas Brown
Case No: A3/2001/2445 CHANF
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE, CHANCERY DIVISION
(Mr Justice Pumfrey)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Mr Robin Hollington QC and Mr Stephen Schaw Miller (instructed by Herbert Smith) for the Appellant
Mr Leslie Kosmin QC and Mr Edward Davies (instructed by Halliwell Landau) for the 1 st and 2 nd Respondents
The 3 rd Respondent was not represented and did not appear
When the Law Commission of England and Wales conducted an empirical survey of petitions presented by members of companies in 1994 and 1995 to the Companies Court in London pursuant to section 459 of the Companies Act 1985 for relief from unfair prejudice, it found that the vast majority (over 96%) concerned private companies (Shareholder Remedies, Consultation Paper No. 142 (1996) pages 235 to 238). In some 22.4% of the cases surveyed, the petitioner was a 50% shareholder. In some 67% of those cases, exclusion from management was alleged. At the time of the survey, only 42.3% of the cases surveyed were active, some 23.7% having already been settled. This indicates that a substantial number of cases brought under section 459 in 1994 and 1995 at least never came to trial, and there are no doubt strong economic incentives to settling shareholders' disputes without a trial. I am not aware of any reason why there should have been any material change in these empirical findings since 1994 and 1995.
The proceedings in the instant appeal are brought under section 459 and also concern a private company. The petitioner is a 50% shareholder and among other allegations he relies on his exclusion from management. Where it is alleged that exclusion from management was wrongful, the respondents to the proceedings not infrequently respond by alleging misconduct justifying the exclusion. Here too the first and second respondents (whom I shall call "the respondents") rely on the petitioner's misconduct. Indeed, the allegations of misconduct on which they rely are also the subject of separate proceedings brought by the company seeking an account of profits and other relief arising out of the various breaches of fiduciary duty said to have been committed by the petitioner. Section 459 proceedings and actions of this nature for breach of fiduciary duty are notoriously costly. The novel point apparently presented by this appeal is the question whether the costs of the separate proceedings for breach of duty can properly be paid by the company or whether they should be borne personally by the respondents to the section 459 proceedings. As a practical matter the respondents now have control of the board of directors of the company. However, the appellant denies that they are entitled to control it.
Before examining the facts of this case, I will explain some of the terms used below. In the present case the separate proceedings for breach of duty ("the Chancery action") are brought by the company and in its name. Such an action is distinguishable from a "derivative action". One of the arguments in this case is that the Chancery action should be reconstituted as a derivative action. By "derivative action" I mean an action commenced by one member of a company on behalf of all other members (other than any member alleged to be a wrongdoer) to enforce a cause of action belonging to the company. The company is joined to the proceedings as a nominal defendant so that relief can be ordered in its favour. There are under the general law only limited circumstances in which such an action can be brought. These circumstances are often referred to as the exceptions to the Rule in Foss v Harbottle (1843) 2 Hare 461: as to these, see, for example, Buckley on the Companies Acts, 15 ed (2000), paragraph 127.9. These circumstances have been extended by section 461 of the Companies Act 1985 which provides that relief from unfair prejudice can take the form of an order authorising proceedings to be taken in the name of the company by persons approved by the court (section 461(2)(d)). In a derivative action the claimant requires the permission of the court to continue the claim ( CPR 19.9; Buckley, paragraph 127.11). In an appropriate case, the court can make an order that the company should indemnify the claimant against any liability in respect of costs incurred in bringing the claim ( CPR 19.9(7)). The court can make such an order at an interim stage. I refer below to an order under CPR 19.9(7) as "a pre-emptive order as to costs".
CPR 19.9 (7) reflects the decision of this court in Wallersteiner v Moir (No.2) [1975] 1 QB 373, at 391–2 per Lord Denning MR and at 403 per Buckley LJ. Lord Denning held that:
"… the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonably incurred by him in the course of the agency … It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris."
As under the practice relating to trustees and beneficiaries, an order granting permission to bring a derivative action or granting a costs indemnity may be made down to disclosure or the exchange of witness statements so the court can consider whether to make a further order at that stage.
Under section 459 of the Companies Act 1985, proceedings are brought by a member personally, and not as agent for the company. The petitioner must show unfairness (see generally Buckley, paragraph 459.23). The starting point for determining the rights of the parties is the company's memorandum and articles, but they may have been qualified by an understanding, the breach of which can give rise to unfair prejudice for the purposes of section 459 (see O'Neill v Phillips [1999] 1 WLR 1092). It is easier to infer such an understanding in the case of a "quasi-partnership" company, that is a company which characteristically has a limited number of members, imposes restrictions on the transfer of shares in its articles and where many of its members participate in management. In the present case, it is common ground that the company is a quasi-partnership company. A quasi-partnership company is referred to below as a "deadlock" company if two members have equal shareholdings and are directors and there is no person who can cast a casting vote at board or company meetings. In this case, it is in issue whether Incasep is a deadlock company. However, the petitioner contends that it is a deadlock company. He has not suggested on this appeal that as he is referred to in the accounts as chairman and the articles provide for the chairman of a board or company meeting to have a second or casting vote, it would be within his power under Incasep's constitution to resolve any deadlock.
Background
This is an appeal by Thomas Edward Jones ("Edward") against the order of Pumfrey J dated 26 October 2001 in so far as the judge thereby dismissed Edward's application for orders restraining the application of funds belonging to Incasep Ltd ("Incasep") from being applied in payment of the costs incurred in the proceedings brought against Edward in claim number HC01C04555 (being the Chancery action referred to above) and in payment of the fees of Harrison Peak ("HP") in connection with bringing and pursuing those proceedings and restraining the holding of a board meeting ratifying the inception of and pursuit of those proceedings in the name of Incasep.
The issued share capital of Incasep is held as to 50% by Edward and as to 50% by his brother, William Frank Jones ("William"), the first respondent to this appeal. The judge's order was made on an interim application in proceedings brought by Edward seeking relief from unfair prejudice pursuant to section 459 of the Companies Act 1985. The Chancery action are proceedings brought in the name of Incasep, seeking damages and an inquiry in respect of alleged breaches of duty by Edward to Incasep. We are told that the amounts claimed total £1.4 m. with interest.
Incasep was established in 1982. Its business is in plant hire and it trades mainly under the name "Greyhound Plant Services". Until 10 October 2001 William and Edward were, according to Edward, the only directors who were involved in any way in the management of its affairs. William was technical director and Edward was managing director. William's wife, Susan, is also a director of Incasep, but until October 2001, on Edward's case, she took no significant part in the management by the board of its affairs. Susan is the second respondent to this appeal. It is part of Edward's case, disputed by William, that William and he agreed in about 1989 that she would resign, which she has not done, and that it was not part of the understandings between William and himself that, if they disagreed on some matter with respect to the management of Incasep, Susan would be able to exercise a casting vote to break the deadlock. In this sense Edward contends that Incasep is a deadlock company. As I have said, it is common ground that it is a quasi-partnership company.
In late 2000 and early 2001 (the precise date is in dispute) the relationship between Edward and William broke down. There were disagreements about business strategies. Edward wanted to expand the enterprise by taking on more plant and equipment with a consequent increase in debt and risk. William did not wish to do this. In February and in May 2001, Edward announced that they should part company....
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