Petition of Alexander Marshall Wishart

JurisdictionScotland
CourtCourt of Session (Inner House)
Judgment Date21 Jul 2009
Neutral Citation[2009] CSIH 65
Docket NumberNo 3

Court of Session Inner House Extra Division

Lord Nimmo Smith, Lord Reed, Temporary Judge Sir David Edward QC

No 3
Wishart
and
Castlecroft Securities Ltd

Company law - Derivative proceedings - Leave to bring proceedings - Expenses - Allowance of and indemnification for expenses in derivative proceedings - Companies Act 2006 (cap 46), secs 265, 266, 268

Section 265 of the Companies Act 2006 (cap 46) provides, inter alia, that a member of a company may, in order to protect the interests of the company and obtain a remedy on its behalf, only raise proceedings under the Act in respect of acts or omissions involving negligence, default, breach of duty or breach of trust by a director of the company. Such proceedings may be raised against either or both the director or another person and are to be referred to as "derivative proceedings" and the act or omission in question as the "cause of action". Section 266 provides that derivative proceedings may only be raised with the leave of the court and application for leave must specify the cause of action and summarise the facts on which the proceedings are to be based. If it appears to the court that the application and the evidence produced do not disclose a prima facie case the court must refuse the application and may make any consequential order as appropriate. If the application is not refused the applicant must serve it on the company and the court may make an order requiring evidence to be produced by the company and may adjourn the proceedings on application to enable the evidence to be obtained, with the company being entitled to take part in the further proceedings on the application. On hearing the application the court may grant the application on such terms as it thinks fit, refuse the application or adjourn proceedings and make such order as to further procedure as it thinks fit. Section 268 provides that the court must refuse leave if satisfied that a person acting in accordance with their duty to promote the success of the company would not seek to raise or continue the proceedings; where the cause of action is an act or omission yet to occur it is authorised by the company; where the cause of action has already occurred that it was authorised by the company prior to occurrence or ratified since occurrence. The section further provides that the court in considering whether to grant leave must take into account in particular, whether the member is acting in good faith in seeking to raise the proceedings; the importance that a person acting in accordance with their duty to promote the success of the company would attach to raising the proceedings; where the cause of action is an act or omission yet to occur whether it could or is likely to be authorised by the company before it occurs or ratified after it does; where it has already occurred whether it could or is likely to be ratified by the company; whether the company has decided not to raise proceedings and whether the member could pursue the cause of action in his own right rather than on behalf of the company.

The petitioner presented a petition to the Court of Session seeking permission to raise derivative proceedings under sec 266. The petitioner was a shareholder to the extent of 40 per cent of the shares in the company Castlecroft Securities Ltd who were called as respondents ('the company'). Following upon consideration by the Lord Ordinary without a hearing, first orders for service upon the company and allowing answers to be lodged by the company and any party claiming interest were duly granted. In addition to the company, the petitioner's fellow shareholder and owner of 40 per cent of the company, Mr Black, entered appearance as a respondent as also another company, SJB.

It was accepted by the respondents that a joint venture had been entered into by Mr Black with a third party for acquisition and development of three properties and that Mr Black and the third party had formed a new company SJB, as the vehicle for the venture, that SJB had acquired properties previously identified by the company as suitable for acquisition and leasing as part of its business, and that SJB had leased the properties out at a profit. The petitioner maintained that SJB had accordingly made a substantial profit which would have accrued to the company had the business opportunity not been diverted from it to SJB. He also averred that he had asked the company's board of directors to instruct an independent solicitor to investigate claims against Mr Black and SJB but the board had refused to do so and in these circumstances he wished to commence derivative proceedings. The respondents maintained that the company would not have received the bank funding it would have needed to acquire the properties and that the petitioner knew of SJB's formation and intention previously but had delayed in making the application. Following a hearing on the petition and answers, the Lord Ordinary granted the application and made an order designed to secure that the company pay the petitioner's expenses and indemnify him against any liability in expenses in the derivative proceedings. The company reclaimed the Lord Ordinary's decision to the Inner House.

Counsel for the respondents submitted that the Lord Ordinary had erred in failing to hold that what was required by the statute was more than a prima facie case on the merits as that expression was understood in the context of applications for interim interdict and that he had failed to address the strength of the proposed claim or the matters listed in sec 268 apart from the issue of the petitioner's good faith. A prospective order in relation to expenses and indemnification was incompetent and in any event inappropriate.

Held that: (1) in terms of sec 268 the court must refuse leave to allow derivative proceedings if either a person acting in accordance with a duty to promote the success of the company would not seek to raise the proceedings or if the company had authorised or ratified the act or omission being the cause of action; that the merits should not be investigated in detail but the court should take into account all of the relevant circumstances including the good faith or otherwise of the party seeking leave and whether or not there was an arguable case against the proposed defenders; and that although the range of matters which the court may take into account is not restricted by the legislation, it must take into account the factors listed in sec 268, otherwise the decision whether to grant leave is a matter for the judgment of the court (paras 36-40); (2) as the Lord Ordinary had not approached the matter on the correct basis, it was open to the court to consider whether the application should be granted and, taking into account the authorities on the fiduciary duties of company directors, the affidavits and the productions, the proposed derivative proceedings were undoubtedly arguable; the availability of an alternative remedy to the petitioner was not a compelling consideration in the circumstances of the present case; and in the whole circumstances taking into account the matters set out in sec 268 the application should be granted (paras 41, 46); (3) an order in relation to a claim for indemnity or relief in respect of expenses should be considered in the context of the leave proceedings as opposed to the derivative proceedings themselves, but that although a prospective order in relation to expenses was competent in leave proceedings it should not be in the unconditional form granted by the Lord Ordinary (paras 62, 63, 68); and appeal refused subject to recall and modification of the Lord Ordinary's interlocutor to allow the respondents to apply for an order in the event of a material change in circumstances.

Observed that: (1) the defenders in the proposed derivative proceedings should not ordinarily be party to the leave proceedings (para 24); (2) applications, if opposed, should ordinarily be dealt with at a hearing on the petition and answers, with evidence taking the form of documentary productions and affidavits (para 28).

Alexander Marshall Wishart presented a petition to the Court of Session seeking permission to raise derivative proceedings under sec 266 of the Companies Act 2006. Following upon consideration by the Lord Ordinary (Glennie) without a hearing, first orders for service upon the company (Castlecroft Securities Ltd) and allowing answers to be lodged by the company and any party claiming interest were granted on 15 February 2008. A hearing on the petition and answers was held following which the Lord Ordinary, on 12 February 2009, granted the application and ordered the company to pay and indemnify against the petitioner's expenses in the derivative proceedings. The company reclaimed against that decision to the Inner House.

Cases referred to:

Aberdeen Rly v Blaikie BrosUNK (1854) 1 Macq 461; 17 D (HL) 20; 2 Eq Rep 1281

Anderson v HoggSCUNK 2002 SC 190; 2002 SLT 354; [2002] BCC 923 and 2000 SLT 634

Barrett v DuckettUNKUNK [1995] BCC 362; [1995] 1 BCLC 243

Bhullar v BhullarUNKUNKUNK [2003] EWCA Civ 424; [2003] BCC 711; [2003] 2 BCLC 241; [2003] WTLR 1397

Carpenter v Pioneer Park Pty LtdUNKUNKENRUNK [2004] NSWSC 1007; 211 ALR 457; 51 AACSR 299; 23 ACLC 93 and [2004] NSWSC 973; 186 FLR 104; 211 ALR 337; 51 ACSR 245

Chahwan v Euphoric Pty LtdUNK [2006] NSWSC 1002

Commonwealth Oil and Gas Co Ltd v Baxter [2007] CSOH 198; 2008 GWD 9-159

Famatina Development Corp Ltd (Re)ELR [1914] 2 Ch 271; 84 LJ (Ch) 48; [1914] WN 334; 30 TLR 668

Foss v HarbottleENRENR (1843) 2 Hare 461; 67 ER 189

Franbar Holdings Ltd v PatelUNKUNK [2008] EWHC 1534; [2008] BCC 885; [2009] 1 BCLC 1; [2009] Bus LR D14

Gibson v Caddall's TrsSC (1895) 22 R 889; 32 SLR 668; 3 SLT 81

Halle v Trax BW LtdUNK [2000] BCC 1020

Industrial Development Consultants Ltd v CooleyWLRUNK [1972] 1 WLR 433; [1972] 2 All ER 162; 116 SJ 255

Jaybird Group Ltd v...

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