Witter v QHSE Solutions Ltd
| Jurisdiction | Scotland |
| Judge | Sheriff Principal MW Lewis,Sheriff NMP Morrison,Sheriff Principal BA Lockhart |
| Judgment Date | 09 September 2016 |
| Date | 09 September 2016 |
| Court | Sheriff Appeal Court |
| Docket Number | No 4 |
[2016] SAC (Civ) 8
Sheriff Principal MW Lewis,
Sheriff NMP Morrison QC and
Sheriff Principal BA Lockhart
Hughes v Weiss and anr [2012] EWHC 2363; [2012] All ER (D) 197 (Oct)
ICU (Europe) Ltd v Ibrahim and anr [2016] CSIH 62; 2016 GWD 23–422
Iesini and ors v Westrip Holdings Ltd and ors [2009] EWHC 2526; [2010] BCC 420; [2011] 1 BCLC 498
Singh v Singh [2014] EWCA Civ 103
Wishart v Castlecroft Securities Ltd [2009] CSIH 65; 2010 SC 16; 2009 SLT 812; 2009 SCLR 696; [2010] BCC 161
Company — Derivative proceedings — Leave to bring derivative proceedings — Whether a director acting in accordance with his duty to promote the success of the company would bring the claim — Whether the availability of a sec 994 petition as an alternative remedy was a relevant consideration — Companies Act 2006 (cap 46), secs 266, 268, 994
Louise Witter applied to the sheriff of Grampian, Highland and Islands at Aberdeen for leave to raise derivative proceedings under sec 266 of the Companies Act 2006 on behalf of QHSE Solutions Ltd against one of its directors, Gregor Gibb. The application comprised a letter in compliance with r 46.1(1) of the Ordinary Cause Rules (Act of Sederunt (Sheriff Court Ordinary Cause Rules) 1993 (SI 1993/1956 (S 223)) attached with a draft writ, in which Ms Witter specified the remedy sought (decree for count, reckoning and payment) and summarised the facts upon which the derivative proceedings were to be based. QHSE Solutions Ltd lodged answers. After hearing oral submissions, the sheriff refused the application. Ms Witter appealed to the Sheriff Appeal Court.
Section 265(1) of the Companies Act 2006 (cap 46) (‘the 2006 Act’) provides that a member of a company may raise proceedings in respect of an act or omission specified in sec 265(3) in order to protect the interests of a company and to obtain a remedy on its behalf. Section 265(3) provides that the acts or omissions specified are any actual or proposed acts or omissions involving negligence, default, breach of duty or breach of trust by a director of the company. Section 266(1) provides that those proceedings can only be raised with the leave of the court. Section 268(1) provides that the court must refuse leave to raise derivative proceedings if satisfied that a person acting in accordance with sec 172 (duty to promote the success of the company) would not seek to raise the proceedings. Section 268(2)(a) provides that in considering whether to grant leave to raise derivative proceedings, the court must take into account, in particular, inter alia whether the member is acting in good faith in seeking to raise proceedings. Section 994 entitles a member of a company to apply to the court for an order on the ground that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial. Section 996 provides that, if satisfied that the sec 994 application is well founded, the court's order may, inter alia, authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct.
A company was managed by two directors. The directors each owned 50 per cent of the shares. The directors' business relationship faltered. One of the directors started a new business in direct competition with that of the company, and ceased to have any involvement in the company in 2010 although she remained a director and shareholder. The remaining director and shareholder continued to operate and manage the company. The remaining director set up a system of transferring money from the company's bank account into his personal bank account. He also submitted invoices to the company for his services, which the company paid. He started a new business in 2011. He transferred ownership of the company's training materials to the new business for a nominal consideration and the company thereafter ceased trading. The departed director sought leave to bring derivative proceedings against the remaining director, seeking count, reckoning and payment against him in respect of two heads of claim. First, she alleged that the company's training materials were transferred for inadequate consideration, and failing an accounting she sought payment of £250,000. No value was attributed to that material in the company's accounts. Secondly, she alleged that there had been unauthorised intromissions with the company's bank account. The company denied the allegations. The sheriff decided that the allegations were lacking in substance and candour, and that no board of directors, properly advised and mindful of the prospects of success and the likely costs of litigation, would choose to initiate the proceedings. He therefore refused leave under sec 268(1) of the 2006 Act. The sheriff went on to consider the factors in sec 268(3). He had particular regard to the behaviour of the departed director in forming her new business, and other evidence which suggested that she had destroyed the business of the company, and concluded that she was not acting in good faith. The sheriff also concluded that a remedy under sec 994 of the 2006 Act would have been more appropriate.
The departed director appealed to the Sheriff Appeal Court. The departed director argued that the sheriff had erred in his conclusion that the proposed claims were lacking in substance and candour, that he was too ready to take into account explanations from the company which were in reality explanations from the remaining director, and erred in finding that the departed director had an alternative remedy. The company argued that a prima facie case required some identifiable basis for the value of the training materials to be identified, that the departed director was in bad faith, that the sheriff was entitled to consider that the explanation from the remaining director was supported by the company's documentation, and that a sec 994 petition would have been more appropriate because that would have allowed all issues to be examined as a whole.
Held that: (1) in relation to the first head of claim, the value of the training materials was speculative, directors of a company would not pursue a claim without regard to whether it had value and what that value might be, and such directors would also have regard to the inherent risks in litigating, the prospects of success, the cost of the proceedings, the funding of the litigation and the solvency of the other party (para 25); (2) in relation to the second head of claim, the sheriff was entitled to have regard to the explanation and supporting documentation offered by the company, which suggested that the balance due by the remaining director was the small sum of £3,700 (para 26); (3) the sheriff was therefore correct to conclude that a director acting in accordance with his duty under sec 172 to promote the success of the company would not pursue the claim (para 26); and appeal refused.
Observed that: (1) while the sheriff did not have to consider the sec 268(2) factors, he was entitled to conclude on the facts that the departed director was not acting in good faith in seeking to bring the proceedings on account of her having an outstanding loan from the company and having competed with it (para 27); and (2) in the specific circumstances of this application, it was entirely appropriate for the sheriff to have regard to the matter of an alternative remedy under sec 994 of the 2006 Act, as what was required here was for the members to resolve how the business of the company was to be wound up rather than squabbling about a select few of their differences, and a sec 994 petition allowed all issues to be looked at as a whole, including allegations made by each director against the other (paras 28–31).
The cause called before the Sheriff Appeal Court, comprising Sheriff Principal MW Lewis, Sheriff NMP Morrison QC and Sheriff Principal BA Lockhart, for a hearing, on 2 August 2016.
At advising, on 9 September 2016, the opinion of the Court was delivered by Sheriff Principal MW Lewis—
Opinion of the...
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