BAILII [Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]

Scottish Court of Session Decisions


You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Wishart, Re An Order Under S.266 Of The Companies Act 2006 [2009] ScotCS CSOH_20 (12 February 2009)
URL: http://www.bailii.org/scot/cases/ScotCS/2009/2009CSOH20.html
Cite as: 2009 GWD 7-115, [2009] CSOH 20, 2009 SCLR 500, 2009 SLT 376, [2009] ScotCS CSOH_20

[New search] [Context] [Printable version] [Help]


OUTER HOUSE, COURT OF SESSION

[2009] CSOH 20

P385/08

OPINION OF LORD GLENNIE

in the Petition of

ALEXANDER MARSHALL WISHART

Petitioner;

for

An order under s.266 of the Companies Act 2006 granting leave to raise a derivative proceeding

ญญญญญญญญญญญญญญญญญ

Petitioner: Barne, Tods Murray LLP

Respondents: Motion, solicitor advocate, bto

12 February 2009

Introduction


[1] This is a petition for an order under s.266 of the Companies Act 2006 ("the 2006 Act") granting the petitioner leave to raise derivative proceedings against John McLeod Black (otherwise known as "Ian Black") and SJB Developments Ltd. ("SJB").


[2]
The petitioner is the owner of 40% of the shares in Castlecroft Securities Limited ("the Company"). The remaining shares are held by Mr Black (40%) and his wife Sheena (20%). The petitioner and Mr Black are stepbrothers. The Company was incorporated in 1984. Its business includes buying and leasing commercial property. The petitioner and Mr and Mrs Black are directors of the Company, together with a Ms Smith. The petitioner claims that he was not involved in the day to day management of the Company's commercial property activities, but this is disputed.


[3]
The petitioner avers, in summary, that in early 2004 the Company identified three sites suitable for acquisition and leasing by the Company as part of its business; that in about March 2004, without his knowledge, Mr Black entered into a joint venture agreement with another property developer in Dundee, a Mr Linton, for the acquisition and development of the three properties; that together they formed a new company, SJB, for this purpose; and that in April 2004 SJB bought two of the sites and leased the third with an option to purchase. He goes on to aver that SJB, with the assistance of employees of the Company, subdivided the properties into office accommodation and leased out the units, thereby making a substantial profit, which profit, he avers, would have accrued instead to the Company had the business opportunity not been diverted from it to SJB. He says that, when taxed with having diverted the Company's business to SJB, Mr Black gave a false excuse about the Company's regular bankers being unwilling to fund the purchase of the properties. He contends that, in diverting the Company's business to SJB, Mr Black acted in breach of fiduciary duty owed by him to the Company; and, further, that Mr Black's knowledge can be imputed to SJB so as to render SJB liable for knowing receipt of the benefit of that breach and for having knowingly assisted in the unlawful diversion of the Company's business. I should make it plain that Mr Black denies any wrongdoing. Although he accepts that he formed a joint venture with Mr Linton, which became SJB, and that SJB purchased or leased the properties and let them out at a profit, he says that this occurred in circumstances where the bank had refused to make any further loans to the Company and that there was, therefore, no question of him or SJB either taking or profiting from business that the Company would otherwise have had. He also says that the petitioner was well aware of the circumstances of SJB's purchase of the properties, but made no complaint until some time had passed.


[4]
The petitioner has asked the Company to investigate and pursue claims against Mr Black and SJB in respect of the above. The Company has refused to do so. The petitioner avers that Mr Black has consistently blocked his attempts to have the matter put in the hands of solicitors and in this he has been assisted by his wife and Ms Smith, both of whom (it is said) simply follow his wishes. Since the Company will not take proceedings against Mr Black and SJB, the petitioner wishes to commence derivative proceedings asserting the rights of the Company against them. To do this he needs the leave of the court under s.266 of the 2006 Act. He has petitioned the court for leave to commence such proceedings. The Company is a respondent to the petition, as also are Mr Black and SJB. Answers have been lodged and both the petition and answers have been adjusted.

Derivative proceedings before the 2006 Act


[5]
Before looking at the relevant provisions of the 2006 Act, I should digress slightly (under reference to certain of the authorities laid before me) to put those provisions and the issues arising therefrom in some sort of context.


[6]
The derivative action developed in England as an exception to the rule in Foss v. Harbottle 2 Hare 461 to the effect that a shareholder could not sue in respect of a wrong done to a company. Generally the pursuer in the action had to be the company. The exception to the rule was first spelled out in cases where a fraud on the company was committed by one or more directors who were then able to use their power to prevent the company bringing proceedings against them. In such cases the minority shareholder or shareholders were allowed to sue on behalf of the company. The exception was expanded to cover cases of "equitable fraud", the term used in Gore-Brown on Companies at para.18[7]-[12], e.g. where directors benefited themselves in breach of fiduciary duty. The history is set out by Templeman J in Daniels v. Daniels [1978] Ch. 406. He summarises the principle in this way (at p.414):

"The principle which may be gleaned [from the cases] is that a minority shareholder who has no other remedy may sue where directors use their powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company."

One example which he gives, citing Cook v. Deeks [1916] 1 AC 554, is the case of directors diverting business in their own favour, the sort of conduct alleged in the current action. The rationale for allowing the aggrieved minority to bring an action on behalf of themselves and other shareholders when the wrongdoers are in control of the company is obvious: "if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue": see Prudential Assurance Co. Ltd. v. Newman Industries Ltd. [1982] 1 Ch. 204, 211, referring to the judgment of Jenkins LJ in Edwards v. Halliwell [1950] 2 All ER 1064.


[7] It is not necessary for present purposes to look more closely at the many cases in which the English courts have dealt with derivative actions, except to note certain procedural questions which arose in connection with such actions and the solutions worked out by the English courts. One of the problems underlying such an action is how the minority shareholder bringing the action should fund it. Should he have to fund the action out of his own pocket? And should he personally be liable in expenses to the other party if the action is unsuccessful? Unless some protection was given to the minority shareholder, he might be deterred from bringing such an action even in cases where it was clear that it was the appropriate course. The solution which found support in the Court of Appeal in Wallersteiner v. Moir (No.2) [1975] QB 373 was based on agency. Whatever the nuances of procedure, the minority shareholder was not really suing on his own behalf but on behalf of the company. In those circumstances, provided that he had reasonable grounds for bringing and continuing the action, he should, like any other agent, be indemnified by the company for his costs and expenses reasonably incurred in so doing. At page 391, Lord Denning MR put it in this way:

"Now that the principle is recognised, it has important consequences which have hitherto not been perceived. The first is 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. This indemnity does not arise out of a contract expressed or implied, but it arises on the plainest principles of equity. It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris .... Seeing that, if the action succeeds, the whole benefit will go to the company, it is only just that the minority shareholder should be indemnified against the costs he incurs on its behalf. If the action succeeds, the wrongdoing director will be ordered to pay the costs: but if they are not recovered from him, they should be paid by the company, and all the additional costs (over and above party and party costs) should be taxed on a common fund basis and paid by the company ....

But what if the action fails? Assuming that the minority shareholder had reasonable grounds for bringing the action - that it was a reasonable and prudent course to take in the interests of the company - he should not himself be liable to pay the costs of the other side, but the company itself should be liable, because he was acting for it and not for himself. In addition, he should himself be indemnified by the company in respect of its own costs even if the action fails. It is a well known maxim of the law that he who would take the benefit of adventure if it succeeds ought also to bear the burden if it fails. ... This indemnity should extend to his own costs taxed on a common fund basis.

In order to be entitled to this indemnity, the minority shareholder soon after issuing his writ should apply for the sanction of the court in somewhat the same way as a trustee does: ... In a derivative action, I would suggest this procedure: the minority shareholder should apply ex parte to the master for directions, supported by an opinion of counsel as to whether there is a reasonable case or not. The master may then, if he thinks fit, straightaway approve the continuance of the proceedings until close of pleadings, or until after discovery or until trial (rather as a legal aid committee does). The master need not, however, decide it ex parte. He can, if he thinks fit, require notice to be given to one or two of the other minority shareholders - as representatives of the rest - so as to see if there is any reasonable objection. ... But this preliminary application should be simple and inexpensive. It should not be allowed to escalate into a minor trial. The master should simply ask himself: is there a reasonable case for the minority shareholder to bring at the expense (eventually) of the company? If there is, let it go ahead."

Both Buckley and Scarman LJJ delivered judgements to the like effect.


[8] The need for there to be some degree of control over the prosecution of a derivative action, and the way in which this might be achieved, was the subject of further comment in three cases in particular. The first is Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (supra). In that case, the judge at first instance (Vinelott J) refused an application by the defendants, directors of N Ltd, that there should be a preliminary issue on the question of whether the plaintiffs (Prudential), as a minority shareholder in N Ltd., were entitled to maintain the derivative claim (on behalf of N Ltd) against them. After the full hearing of the action (lasting 72 days), the judge found the directors guilty of conspiracy and fraudulent conduct and held that the interests of justice required that the plaintiffs, as minority shareholders, should be permitted to bring an action on behalf of the company. The Court of Appeal reversed most of these findings. It held also that the judge should have ordered the trial of a preliminary issue before the trial of the action on the question of whether the company was under the control of those alleged to have practised the fraud against it, this being the particular issue relevant to the plaintiffs' right to bring a derivative action. The court indicated its concern about the procedure which had been followed in the following passages (at pp.221-2):

"... we have no doubt whatever that Vinelott J. ... ought to have determined as a preliminary issue whether the plaintiffs were entitled to sue on behalf of Newman by bringing a derivative action. It cannot have been right to have subjected the company to a 30-day action (as it was then estimated to be) in order to enable him to decide whether the plaintiffs were entitled in law to subject the company to a 30-day action. Such an approach defeats the whole purpose of the rule in Foss v. Harbottle and sanctions the very mischief that the rule is designed to prevent. ...

... The second observation which we wish to make is merely a comment on Vinelott J's decision that there is an exception to the rule in Foss v. Harbottle whenever the justice of the case so requires. We are not convinced that this is a practical test, particularly if it involves a full-dress trial before the test is applied. On the other hand we do not think that the right to bring a derivative action should be decided as a preliminary issue upon the hypothesis that all the allegations in the statement of claim of "fraud" and "control" are facts, as they would be on the trial of a preliminary point of law. In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle. On the latter issue it may well be right for the judge trying the preliminary issue to grant a sufficient adjournment to enable a meeting of shareholders to be convened by the board, so that he can reach a conclusion in the light of the conduct of, and proceedings at, that meeting."


[9]
The second case is Smith v. Croft (No.2) [1988] Ch. 114, in which Knox J heard an application to strike out a derivative action as frivolous and vexatious and an abuse of the process of the court on the basis that the minority shareholder plaintiffs were not entitled to bring or continue the action asserting the rights of the company. The arguments centred around two questions: first, whether actions to recover money paid away ultra vires by the company were outwith the rule in Foss v. Harbottle; and, second, whether the views of an independent majority of shareholders should prevail if they were against the action being brought. The details are not relevant here. Knox J decided in favour of the defendants on the second point and dismissed the action. In concluding his judgment, and having indicated that the procedure in that case was unsatisfactory, he said this:

"For my part I would say three things. First, I consider that there may well be a much stronger case for requiring a prospective plaintiff to have the onus of establishing that his case falls within the exceptions to the rule in Foss v. Harbottle or outside it altogether than there is for putting the same onus upon him to show that the company would be likely to succeed if it brought the action. Upon the latter it might well be appropriate to apply the usual test under RSC Ord.18 r.19 and the inherent jurisdiction which puts the onus on the defendants to show the case is effectively unarguable. ...

Secondly, I consider it would be highly desirable for applications in respect of costs under Wallersteiner v. Moir (No.2) [1975] QB 373 procedure" - a matter to which I shall return later - "to be made at the same time as the plaintiff establishes whatever it is that he does have to establish. A great deal of expense has been caused in this case by the piecemeal way in which the matter has proceeded.

Thirdly I believe that it would be helpful for there to be specific procedure laid down, whether by way of rules of court or practice direction I know not, for the initiation and prosecution of actions by minority shareholders to recover on behalf of a company."


[10]
The third case is Barrett v. Duckett [1995] BCC 362. In that case the defendants applied to strike out the action on the grounds that the plaintiff had an alternative remedy. A winding up petition had been presented so that the liquidator (if a winding up order was made) could decide whether it was in the interests of the company to pursue the action. There was also a challenge to the plaintiff's bona fides in bringing the action. The Court of Appeal, reversing the judge at first instance, struck out the action on both grounds. The case is relevant here only for the following passage in the judgment of Peter Gibson LJ (at p.367) summarising what had by then become established as the general principles governing derivative actions:

"The general principles governing actions in respect of wrongs done to a company or irregularities in the conduct of its affairs are not in dispute:

(1) The proper plaintiff is prima facie the company.

(2) Where the wrong or irregularity might be made binding on the company by a simple majority of its members, no individual shareholder is allowed to maintain an action in respect of that matter.

(3) There are however recognised exceptions, one of which is where the wrongdoer has control which is or would be exercised to prevent a proper action being brought against the wrongdoer; in such a case a shareholder may bring a derivative action (the rights are derived from the company) on behalf of the company.

(4) When a challenge is made to the right claimed by a shareholder to bring a derivative action on behalf of the company, it is the duty of the court to decide as a preliminary issue the question whether or not the plaintiff should be allowed to sue in that capacity.

(5) In taking that decision it is not enough for the court to say that there is no plain and obvious case for striking out; it is for the shareholder to establish to the satisfaction of the court that he should be allowed to sue on behalf of the company.

(6) The shareholder will be allowed to sue on behalf of the company if he is bringing the action bona fide for the benefit of the company for wrongs to the company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed."

Paras.(4) to (6) bear directly upon the issue before me.


[11]
Rules of Court were introduced in England and Wales in 1994 regulating the prosecution of derivative actions. These were originally contained in RSC Order 15 Rule 12A and later by Rule 19.9(3) of the Civil Procedure Rules. They required the plaintiff in such an action to apply to the court within a short time after commencing the action for leave to continue it. The application required to be supported by written evidence. At the hearing of the application the court could grant leave to continue the action, for such period and upon such terms as the Court might think fit; dismiss the action; or adjourn the application and give such directions as to joinder of parties, the filing of further evidence, discovery, cross-examination of deponents and otherwise as it might consider expedient. If, after the Court had given leave to continue the action, there was a material change in circumstances, any defendant could make an application requiring the plaintiff to show cause why the court should not dismiss the action.

[12] Until the coming into force of the 2006 Act, the position in Scotland was less developed than that in England. The authorisation of a derivative action (though not called such) was, before the 2006 Act, already part of the armoury possessed by the court when faced with an "unfair prejudice" petition under s.459 of the 1985 Act: see s.461(2)(c). But otherwise the position appeared to some to be unclear. In their comments on "the shareholders' action in Scotland" (Shareholder Remedies, Law Com. No 246, 1997, Appendix D), the Scottish Law Commission expressed the view (para.2) that Scots law "did not have a derivative action". They recognised that a shareholder in Scots law not only had the right to raise an action to protect his own interests but also, separately, had the right to raise an action to obtain a remedy for the company; but the reasoning in the reported cases on this matter was, in their view, "neither consistent nor developed" (para.6). One matter was clear, and that was that the question, being one of title to sue, was in Scotland a matter of substantive law, as distinct from the position in England where the matter was one of procedure. Because the law in Scotland was in a state of uncertainty, it was desirable (para.10) to put the right of a shareholder to raise an action to protect the interests of the company, and to obtain a remedy on its behalf, on a clear statutory basis. It is apparent from para.4 of their recommendations that there was a desire "to achieve, so far as possible and reasonable, consistency in substantive company law throughout the United Kingdom".


[13]
Two cases decided after that Report suggest that the derivative action was in fact a part of Scots law, albeit relatively undeveloped. The first is Anderson v. Hogg 2000 SLT 634. In refusing a petition under s.459 of the Companies Act 1985 (now s.994 of the 2006 Act), Lord Reed expressed the view that in a case where the gravamen of the complaint was that the director had acted unlawfully vis เ vis the company (rather than simply unlawfully or unfairly vis เ vis the petitioner), the appropriate proceedings should be in the form of a derivative action by the minority shareholder against the director to enforce the company's rights, and he summarised in some detail the principles to be derived from the English cases. The second is Wilson v. Inverness Retail and Business Park 2003 SLT 301. There Lord Eassie was concerned with a plea by the defenders to the competency and relevancy of a derivative action raised against them by a minority shareholder. In rejecting that plea, he discussed certain aspects of the derivative action in England and Scotland. The competency of the derivative action was, he said, "vouched in Scottish authority going back at least to 1898 ..." (see para.[21] of his opinion). He observed that the issue had, in Hannay v. Muir (1898) 1 F. 306, properly been conceived as one of title to sue and had been addressed on the customary Scottish basis of taking the pursuers' averments pro veritate, an approach which was not questioned in the Inner House. He set out in para.[22] the "essential tests for the admissibility of the derivative action", namely that there had been fraud - in the wider Burland v Earle [1902] AC 83 sense - resulting in loss to the company and that those responsible for that fraud and loss remained in majority control, thus preventing institution of proceedings at the instance of the company. Rejecting the wholesale importation of English procedure, he said this:

"In Scottish procedure and terminology a 'preliminary issue' of competency or title to sue may of course be addressed but it is addressed normally by the tabling of an appropriate preliminary plea of incompetence or no title to sue, which may then be dealt with either by debate, or if need be, by a proof before answer on a question of competency or title to sue in the event that the averments pertinent to such an issue are disputed in fact. I can see no reason wherefor the normal tests and procedures should not apply in an action such as the present. Nothing in the Scottish authorities suggests otherwise."

For the same reasons he rejected the defenders' invocation of English rules of procedure contained in the Civil Procedure Rules: matters of procedure were matters for the lex fori.


[14] It is clear that in
Scotland recourse to a derivative action was less common than in England and that, perhaps in consequence, no special practice or procedure had developed in Scotland, either by case law or by Rules of Court, to deal with the potential problems identified by the English courts in the cases to which I have referred. The traditional Scottish approach to disputes about competency and relevancy was taken. Unless a preliminary proof was ordered, these points were dealt with at debate on the basis of taking the pursuer's averments pro veritate. Perhaps more importantly, there was no particular point at which a pursuer in a derivative action had to satisfy the court that the action should be allowed to proceed. That would depend upon what, if any, pleas-in-law were tabled by the defenders to the competency or relevancy of the action. As I have already noted, it was the desire of the Scottish Law Commission to achieve a measure of consistency in substantive company law throughout the United Kingdom. At para.40, after referring to the English Rules of Court, they said that they considered it "highly desirable that there should be a consistency in policy between English law and Scots law." This must be understood as a reference to the desirability of similar practical procedural steps to regulate the bringing or continuance of a derivative action. At para.46 they discussed the concept of leave being required to raise an action and recommended that there should be such a requirement. Although it is clear that the 2006 Act did not match precisely the recommendations of the Scottish Law Commission, it did go some way to regulate the circumstances in which a derivative action could be brought and to provide a procedural basis for this to happen.

The relevant provisions of the Companies Act 2006


[15]
Part 11 of the Companies Act 2006 contains detailed provisions regulating the bringing of derivative proceedings. The Act legislates separately for England and Wales and for Scotland, though the sections regulating the bringing of derivative actions in Scotland, in Chapter 2 of that Part of the Act, follow closely those applicable to England and Wales in Chapter 1. There are certain differences in procedure, which are important; but the tests to be applied in assessing whether a derivative action should be allowed to be raised (in Scotland) or to be continued (in England) are, in substance, identical.


[16]
The provisions concerning derivative actions in Scotland are contained in ss.265-269. The sections material to the present application are ss.265, 266 and 268. I set out the relevant parts below:

"265 Derivative proceedings

(1) In Scotland, a member of a company may raise proceedings in respect of an act or omission specified in subsection (3) in order to protect the interests of the company and obtain a remedy on its behalf.

(2) A member of a company may raise such proceedings only under subsection (1).

(3) The act or omission referred to in subsection (1) is any actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.

(4) Proceedings may be raised under subsection (1) against (either or both)

(a) the director referred to in subsection (3), or

(b) another person.

(5) It is immaterial whether the act or omission in respect of which the proceedings are to be raised or, in the case of continuing proceedings under section 267 or 269, are raised, arose before or after the person seeking to raise or continue them became a member of the company.

(6) This section does not affect-

(a) any right of a member of a company to raise proceedings in respect of an act or omission specified in subsection (3) in order to protect his own interests and obtain a remedy on his own behalf, or

(b) the court's power to make an order under section 996(2)(c) or anything done under such an order.

(7) In this Chapter -

(a) proceedings raised under subsection (1) are referred to as "derivative proceedings",

(b) the act or omission in respect of which they are raised is referred to as the "cause of action",

(c) "director" includes a former director,

(d) references to a director include a shadow director, and

(e) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.

266 Requirement for leave and notice

(1) Derivative proceedings may be raised by a member of a company only with the leave of the court.

(2) An application for leave must-

(a) specify the cause of action, and

(b) summarise the facts on which the derivative proceedings are to be based.

(3) If it appears to the court that the application and the evidence produced by the applicant in support of it do not disclose a prima facie case for granting it, the court-

(a) must refuse the application, and

(b) may make any consequential order it considers appropriate.

(4) If the application is not refused under subsection (3)-

(a) the applicant must serve the application on the company,

(b) the court-

(i) may make an order requiring evidence to be produced by the company, and

(ii) may adjourn the proceedings on the application to enable the evidence to be obtained, and

(c) the company is entitled to take part in the further proceedings on the application.

(5) On hearing the application, the court may-

(a) grant the application on such terms as it thinks fit,

(b) refuse the application, or

(c) adjourn the proceedings on the application and make such order as to further procedure as it thinks fit.

...

268 Granting of leave

(1) The court must refuse leave to raise derivative proceedings or an application under section 267 if satisfied-

(a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to raise or continue the proceedings (as the case may be), or

(b) where the cause of action is 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 is 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.

(2) In considering whether to grant leave to raise derivative proceedings ... the court must take into account, in particular-

(a) whether the member is acting in good faith in seeking to raise or continue the proceedings (as the case may be),

(b) the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to raising or continuing them (as the case may be),

(c) where the cause of action is 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 is 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 raise proceedings in respect of the same cause of action or to persist in the proceedings (as the case may be),

(f) whether the cause of action is one which the member could pursue in his own right rather than on behalf of the company.

(3) In considering whether to grant leave to raise derivative proceedings or an application under section 267, the court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter. ..."

Sub-sections (4)-(6) provide for the making of regulations to add to or alter these criteria. No such regulations have presently been made.

Procedure


[17]
No Rules of Court have been made in Scotland directed specifically to the question of how applications for leave under the Act should be made. The petitioner has approached the matter on the basis that the application requires its own originating process. This approach was not criticised by the respondents. In accordance with Rule 14.2(h), the correct originating process for an application under the Act is by petition in the Outer House. The application must specify the cause of action, and summarise the facts on which the derivative proceedings are to be based. In terms of s.266(3) of the Act, the court is required to consider whether or not the petitioner has shown a prima facie case for granting leave. It is clear from s.266(4) - which requires service on the company only if the application gets past this stage - that the court is required to consider the question of prima facie case in terms of s.266(3) on an ex parte basis. In accordance with established petition procedure, this will presumably be at the stage of deciding whether to grant a first order for service and intimation. If it appears to the court at that stage that the application and evidence produced in support of it do not disclose a prima facie case for granting it, the refusal of the application for leave will take the form of refusing to grant a first order. In assessing whether or not a prima facie case has been made out, the court is to have regard not only to the statements in the petition but also to any evidence produced in support of it. In the normal case, unless some interim relief is sought, the first order in a petition is granted without a hearing, though of course it can be starred if the court is so minded. Any evidence sought to be relied on should therefore be lodged in process. It seems to me that it would be helpful for the court in carrying out its task of assessing whether a prima facie case is made out if a draft of the Summons in the proposed action were lodged in the petition process. This was done in the course of proceedings in the present application.


[18]
In the present case, the motion for a first order for service and intimation was considered by the court ex parte and without appearance. The court was not satisfied that the application did not disclose a prima facie case - the double negative reflects the statutory approach - and pronounced a first order for service and intimation specifically under reference to s.266 of the Act. Both the company and the proposed defenders (Mr Black and SJB) were named in the schedule to the petition as persons upon whom service was sought to be made. However, the first order allowed service upon the company only. S.266(4)(a) requires service on the company at this stage, and s.266(4)(c) provides that the company is entitled to take part in further proceedings. No mention is made of those identified as defenders in the proposed action. It is not, in my view, necessary for the petition to be served on the potential defenders in the derivative action, though they will no doubt become aware of the petition by virtue of their position in the company. Indeed, it seems to me to be undesirable that the potential defenders should have the opportunity in their own name to have any say in proceedings commenced for the purpose of determining whether or not they should be sued by or on behalf of the company. Their involvement at the leave stage might result in that application being used as a dress rehearsal for the full action.


[19]
In the event, however, one set of answers to the petition was lodged on behalf of both the company and the potential defenders, who entered the process voluntarily; and for the early stages of the application before me Mr Motion, who appeared for the respondents, appeared on behalf of all three. The answers not only put in issue the averments anent the alleged breaches of fiduciary duty but also made allegations against the petitioner of delay and lack of good faith.


[20]
The matter came out before the court By Order in July 2008. At that stage it became apparent that there was a significant dispute between the parties as to the manner and level of the enquiry which the court required to make at the stage of deciding whether or not to give leave to raise derivative proceedings.


[21]
For the petitioner, it was argued that the substantial differences between the parties as to the facts could and should be resolved in the derivative proceedings themselves if leave were granted. At the stage of the application for leave, the court merely required to decide whether the petitioner had a prima facie case and, if so, whether to grant leave - it did not require to adjudicate on the merits of the claim at that stage. The court had already decided, at the ex parte stage, that the petitioner had a prima facie case. That was sufficient. All that remained were the questions of delay and bad faith. It was wrong in principle to conduct a full enquiry at this stage. Affidavit evidence could be required where necessary.


[22]
For the respondents, on the other hand, it was argued that the application could only be disposed of after an enquiry into the facts, both because of the plea of mora, which raised questions of fact which (if established) gave rise to a substantive defence, and because a large number of other factual matters were in dispute. The petitioners' argument that only a prima facie case on the merits had to be shown - and had been shown - was misconceived. Such an approach was relevant only to the "sifting" process at the ex parte stage. Once that stage had been passed - which it had, since the court had pronounced a first order rather than refuse the application - the application moved to the inter partes stage at which the court was required to take into account certain particular matters, in particular the issue of good faith, which required factual evidence. The credibility of both the petitioner and Mr Black would be put in issue; and since their credibility impinged on almost every aspect of the dispute, the court would have to hear evidence on all the matters in dispute both on the merits of the proposed action and the discrete issues of mora and good faith. Such a hearing, it was estimated, would involve two days of evidence and one of submissions. I should say that that estimate seemed to me to be optimistic if all the disputed facts were to be gone into.


[23]
Since the proper approach to such applications under the Act had not been the subject of any judicial comment in Scotland, I asked parties' representatives to assist by putting before the court any materials which might point the court in the right direction. This they both did in the form of written notes of argument referring to a number of authorities and articles from Scotland and England and further afield. I am grateful to them for their assistance in this regard. I have already mentioned the principal English and Scottish authorities pre-dating the Act, and the Report of the Scottish Law Commission, to which I was referred. In addition, my attention was drawn to a wide range of cases and materials touching upon various aspects of the problem. These included: Gillespie v. Toondale Ltd [2005 CSIH 92] on the meaning to be given to the expression "prima facie case"; Rule 19.9 of the CPR in England, which is the Rule relevant to applications to continue derivative proceedings under the 2006 Act and the related Practice Direction; two recent unreported decisions in the Chancery Division in England, namely Mission Capital Plc v. Sinclair [2008] EWHC 1339 and Franbar Holdings Ltd v. Patel [2008] EWHC 1534, which were illustrative of the approach taken in England under the equivalent provisions of the Act, though neither sought to lay down any points of principle or general guidance as to the manner in which the Act should be applied; three decisions of the Supreme Court of New South Wales, namely Swansson v. Pratt [2002] NSWSC 583, Braga v. Braga Consolidated Pty Ltd. [2002] NSWSC 603 and Maher v. Honeysett and Maher Electrical Contractors [2005] NSWSC 859, all of them decisions under the provisions of the Australian Corporations Act 2001 dealing with leave to bring derivative proceedings, and the former cited principally for observations relating to the "good faith" requirement in that legislation; Hannigan and Prentice, The Companies Act 2006 - A Commentary, at paras.4.39-4.92; McBryde, The Law of Contract in Scotland, 3rd ed. at paras.17-23 to 17-34, on the question of good faith in a commercial context; an article by Rupert Reed at Comp. Law. 2000, entitled "Derivative Claims: The Application for Permission to Continue"; an article by Ian M Ramsay and Benjamin B Saunders in the Journal of Corporate Law Studies for October 2006 entitled "Litigation by Shareholders and Directors: An Empirical Study of the Australian Statutory Derivative Action"; and an article by Melissa Hofmann published in the Bond University Faculty of Law Corporate Governance eJournal 2005 entitled "The Statutory Derivative Action in Australia: An Empirical Review of its Use and Effectiveness in Australia in Comparison to the United States, Canada and Singapore". I was also referred to certain parliamentary debates during the passing of the Act to show that it was intended to "tighten up" the controls over the bringing of derivative actions - though I doubt whether, even if permissible, it is necessary to look at the debates in order to discern this purpose, since such a purpose is manifest from the terms of the Act itself. I do not propose to cite all of these at length. None bear directly on the proper approach under this or equivalent legislation, but they provide some insight as to the approach taken in different jurisdictions to the recurring problems.


[24] I have already noted that the requirement of leave to commence derivative proceedings is new so far as Scotland is concerned, but that the provisions of this part of the Act concerning Scotland replicate to a large extent (though not in their entirety) the provisions applicable to derivative actions in England. They are clearly informed by the prior English practice developed before the Act in case law and in rules of court. Accordingly, whilst it is important to have regard to the significant procedural differences between Scotland and England, it would in my opinion be wrong, now that the Act has come into force, in considering the proper approach to applications made under the Act, for the court to shut its eyes to the experience of the earlier English cases, which highlight some of the problems inherent in controlling the commencement or prosecution of derivative actions and suggest possible solutions.


[25]
Certain features of this statutory framework for derivative proceedings in Scotland stand out. Of significance is the fact that, in Scotland, derivative proceedings may only be raised with the leave of the court. This means that the leave of the court must be sought and obtained before derivative proceedings are brought. In this respect the position in Scotland differs from that laid down for England, where the claimant may bring a derivative claim (as it is there called) without leave but is required (by s.261) to seek permission from the court to continue it. This difference has procedural consequences. Whereas in England the application for permission to continue the derivative action is made in the derivative action itself, so that the application for permission is part of the incidental procedure in the substantive action, in Scotland, where ex hypothesi there is no derivative action on foot when the application for leave is made, it would seem that the application for leave requires to be made by a separate originating process. This raises potential difficulties. One such difficulty is that any delay in the final determination of the application for leave to commence the derivative action will obviously delay the bringing of the derivative action itself and may, in an extreme case, give rise to issues of prescription. Another is its effect on the ability of the court to keep the action under review once leave has been granted. I shall refer to this further in due course.


[26] The prescription question alone, to my mind, would suggest that it cannot have been intended that there should be a full investigation into the merits of the proposed claim at the stage at which the court is being asked to give leave to bring the proceedings. Such an investigation, if allowed, even without an appeal by the dissatisfied party, might take many months or even years. But there are other reasons too for rejecting this approach. The procedure laid down in the Act is no doubt intended to facilitate judicial control over derivative proceedings by introducing a "gateway" or "threshold" through or over which the applicant must pass before being allowed to commence (or in England, continue) his action. This is to avoid the obvious risk of abuse if every minority shareholder had an unfettered right to bring such an action. No such control had previously existed in
Scotland. The very nature of such a control mechanism must mean that the process at that stage is not intended to be lengthy and drawn out. Otherwise the damage is done, and the unprincipled or mala fide minority shareholder, at whom these controls are in part directed, would be able to use the leave application to drag the company through all the anguish and expense of the litigation which it is the object of the legislation to avoid. It seems to me that the warnings given in Wallersteiner v. Moir (No.2) against letting the application for leave escalate into a full trial is very much in point. So also are the remarks in Prudential Assurance Co. Ltd. v. Newman Industries Ltd.: to subject the company to a lengthy proof to decide whether or not it should be subjected to a lengthy proof would not only defeat the purpose of the rule in Foss v. Harbottle - it would also defeat the whole point of the legislation which is designed to protect the company from that very thing.


[27] What then should be the approach which the court should take to applications for leave? S.266(3) requires the court summarily to refuse the application if it appears to it that the application does not disclose a prima facie case for granting it. It seems to me that there are two elements which a court must consider at the ex parte stage. It must consider
whether the petitioner has disclosed a prima facie case on the merits, i.e. that there has been a relevant act or omission (within the meaning of s.265(3) of the Act) by one or more directors of the company; and it must also consider whether the petitioner has disclosed a prima facie case that those responsible for that act or omission are and remain in majority control, thus preventing institution of proceedings at the instance of the company. The latter requirement I take to be implicit in the nature of derivative proceedings (see per Lord Eassie in Wilson v. Inverness Retail and Business Park). It is significant that the "merits" question, i.e. whether there has been a relevant act or omission by a director, is not addressed again in the various enumerated matters of which the court must take account at the inter partes stage. It seems to me that this reflects an intention on the part of the legislature that the merits of the underlying claim are, at the leave stage, not to be the subject of a lengthy disputed proof. It is sufficient that the applicant disclose a prima facie case on the merits. The test of prima facie case is well known and is often applied in cases where, for example, interim interdict is sought. It presents no difficulties in practice. The same test is used in s.261 of the Act, the equivalent section for derivative proceedings in England. It is the test suggested in Prudential Assurance Co. Ltd. v. Newman Industries Ltd. For what it is worth, s.237 of the Australian Act requires the court to be satisfied that "there is a serious question to be tried" before it can grant the application, and the cases to which I was referred showed that the Australian courts would not enter into the merits of the proposed action but would require the applicant for leave to satisfy "the same relatively low standard as applies in an application for an interlocutory injunction": see Maher v. Honeysett and Maher Electrical Contractors at para.19.


[28]
In Shaw v. Croft (No.2), Knox J considered that the principal onus on the plaintiff (here, the petitioner) should be on the question whether the case fell within the exception to the rule in Foss v. Harbottle rather than on the prospects of success on the merits of the action. This seems to me to be reflected by the structure of the Act, which after the ex parte stage, and on the assumption that a prima facie case has been disclosed, appears to focus attention on factors which are germane to the question of whether the applicant should be allowed to bring the action against the wishes of the company.


[29]
At the next stage, the inter partes hearing, the court is required, in terms of s.268(1), first to consider whether a person acting in accordance with his duty to promote the success of the company would seek to raise the proceedings; and whether the act or omission complained of was or has been authorised by the company or has subsequently been ratified by it. If it is satisfied under (i) that such a person would not seek to raise the proceedings, or under (ii) that the act or omission has been authorised or ratified, it must refuse leave to raise the derivative proceedings. If it is not required by reason of the above to refuse leave, the court is next required by s.268(2) to take into account certain other matters in considering whether or not to grant leave, in particular:

(a) whether the member is acting in good faith in seeking to raise the proceedings;

(b) the importance that a person acting in accordance with his duty to promote the success of the company would attach to raising them;

(c)-(d) whether the act or omission complained of could be and is likely to be authorised or ratified by the company as the case may be;

(e) whether the company has decided not to raise proceedings in respect of the same cause of action;

(f) whether the cause of action is one which the member could pursue in his own right rather than on behalf of the company;

and, in terms of s.268(3), it must also have particular regard to any evidence as to the views of members of the company who have no personal interest, direct or indirect, in the matter. None of these matters relates directly to the merits of the derivative action itself. It is of course possible that, in dealing with some of the matters which the court is required to take into account, some further consideration of the merits of the derivative action might be relevant. But in my opinion these matters too should usually be dealt with on the basis of the matters averred in the petition and any evidence lodged in support, without the need for extensive evidence. That is not, of course, to say that the respondent should never be permitted, by adducing evidence, to show that the petitioner's case is clearly unfounded, but that should not be used as a vehicle for a full contested hearing on disputed evidence. It is true that, in contradistinction to the merits of the claim, which will be re-visited in the action itself (if leave is given), this will be the only opportunity for the company to challenge the applicant's right to bring an action on its behalf and, possibly, at its expense. However, with one exception, the specific matters to be taken into account do not require a great deal of evidence. Thus, using the numbering and lettering above, (i) and (b), which raise the question of what attitude a person acting in accordance with his duty to promote the interests of the company would take to the proposed proceedings, involve an assessment of the value of the proceedings to the company, as against the likely time, expense and disruption likely to be involved in pursuing the action to a conclusion; (ii) and (c)-(d) raise questions of authority and ratification, which involve the application of legal principles to readily ascertainable fact; (e) falls into a similar category; (f) raises a question of law; and, as to the views of disinterested members of the company (if any) under s.268(3), these can be ascertained, if appropriate, by summoning a meeting. Only the question of "good faith", item (a), gives rise to the likelihood of a serious conflict of evidence.

The respondents' case - lack of good faith


[30]
In fact, the respondents did not suggest that the application for leave should be refused on any of the various grounds except for lack of good faith. It was on the question of good faith that the respondents wished for a full hearing on evidence. If there were some discrete point of fact which required to be established, I can readily see that a court might be prepared to allow evidence to be adduced on that point. But, as Mr Motion candidly pointed out in his Note of Proposals for Further Procedure on behalf of the respondents, the question of good faith in the present action "impinges upon virtually every issue pled by the petitioner and the respondents". In particular, it would cover the whole underlying merits of the proposed claim, since the main thrust of the "good faith" attack on the petitioner was based on proving that the petitioner had always been aware of what Mr Black was doing, and of the fact that the company had not been in a position to follow up the business opportunity which, it is alleged, was diverted to SJB. These are the very issues at the heart of the proposed action. Thus, if a full proof were allowed on the issue of good faith it would give rise to a full dress rehearsal on all the matters likely to be put in issue in the derivative action if leave were to be granted. The whole purpose of having a threshold test would be frustrated. It would again be a case of a lengthy hearing on evidence (under the guise of dealing with the issue of good faith) in order to enable the court to decide whether or not the company should be forced to allow an action of equal length to be taken on its behalf. If at the end of the hearing on the issue of good faith the court refused the application for leave, there would have been little, if any, saving in expense. If, on the other hand, leave were granted to proceed with the derivative action, then the cost of the proceedings would end up being much greater than if there had been no threshold test introduced by the Act.


[31]
The averments made by the respondents in their answers on the question of the petitioner's lack of good faith are contained in a series of numbered sub-paragraphs in Answer 9. Points (i) and (ii) are points going only to the merits of the claim rather than to the question of bad faith. The same, perhaps, applies to point (iii), namely that the petitioner knew about the incorporation and purpose of SJB at all material times. The remaining points can be summarised as follows: (iv) the petitioner delayed for four years before seeking to raise the action; (v) the petitioner refused to discuss matters and walked out of a critical board meeting of 25 January 2008; (vi) the petitioner has a recent history of litigating grievances against the respondents; (viii) (sic) the petitioner walked out of the company on 15 June 2007 following the appointment of Anne Smith as managing director; (ix) the petitioner was dismissed as an employee of the company on 5 December 2007 and is currently engaged in proceedings before an Employment Tribunal relative to that dismissal; (x) the petitioner remains in dispute with the respondents about other matters. Having considered the averments in points (iv) to (x), I was uncertain as to how, even if they were fully made good, they could really add up to the sort of case where the court would refuse the application on grounds of lack of good faith. For example, the petitioner may well have walked out of a board meeting, but if he did so because of a dispute about a decision made by the majority relevant to the subject matter of the proposed claim in circumstances where there was already acrimony between the parties, how does that indicate a lack of good faith? His so-called history of litigating grievances says nothing about good faith, unless it is suggested that the litigation upon which he embarked was wholly unfounded. That indeed is what is said about one of the actions which the petitioner commenced against the company - but the other action, even on the respondents' averments, was settled by the payment to the petitioner of a significant sum, with the respondents paying the petitioner's expenses.


[32]
It seemed to me that I should allow the respondents an opportunity of putting in Affidavits dealing with the matters raised in points (iv) - (x) above, in particular so that they could set out how those matters averred in those points were alleged to demonstrate a lack of good faith. The relevant interlocutor allowed the respondents to lodge such Affidavits within 21 days, and the petitioner (if so advised) to lodge Affidavits in response within 14 days thereafter. Affidavits were duly lodged and the hearing resumed.


[33]
There has not, so far as I am aware, been any attempt to state compendiously the considerations which might apply in determining whether the applicant is or is not acting in good faith. In Maher v. Honeysett and Maher Electrical Contractors at para.28, citing Swansson, Brereton J identified two inter-related factors relevant to the question: first, whether the applicant for leave honestly believes any cause of action exists and has a reasonable prospect of success; and secondly, whether the applicant is seeking to bring the derivative suit for such a collateral purpose which would amount to an abuse of process. He noted that those two factors would in most though not all cases entirely overlap. He noted also that the good faith requirement was designed to prevent proceedings being used to further the purposes of the applicant rather than of the company as a whole. Without intending to be prescriptive, I would accept that this identifies the sort of considerations which the court will wish to take into account. However, I would add this. In a case where the court is satisfied that a prima facie case is made out, it will be difficult to show that the applicant for leave does not honestly believe that the company has a cause of action and that that cause of action has a reasonable prospect of success. In such circumstances it will be difficult for the respondent to show that the applicant is seeking to bring the derivative action for a collateral purpose of the type alluded to. If there is a prima facie case of a director having committed an act or omission of the type covered by the definition of derivative proceedings in the Act, why should an applicant be prevented from bringing the action simply because it may be asserted against him that he has other less creditable motives than a desire to see the company put back into funds? It seems to me that it will be a rare case, requiring precise averments and cogent evidence, where an application for leave is refused on the grounds that the petitioner is not acting in good faith.


[34]
Every case must, of course, be dealt with on its own merits. In the present case, for reasons which I have already set out, the nature of the "bad faith" averments pled in Answer 9 did not, without more, lead me to the view that this was a case where the lack of good faith was likely to be established as a relevant and powerful ground for refusing leave to raise derivative proceedings. Having read and considered the Affidavits lodged, and heard further submissions, I was not persuaded that the lack of good faith had been made out. For those reasons, exercising my discretion in accordance with the guidance given in s.268 of the 2006 Act, I propose to grant leave to the petitioner to raise derivative proceedings against the company in respect of the matters set out in the petition and in the draft summons (No.20 of Process). In those circumstances, given that issues of credibility may arise in the derivative proceedings themselves, it would be inappropriate and probably unhelpful if I were to express any more detailed views as to the issues raised in the petition and answers and in the affidavits. I would simply add, in keeping with the approach of Lord Eassie in Wilson v. Inverness Retail and Business Park, that the company should be joined as a defender to the action. In this way it will be bound by the result, although it will play no active part itself.

The petitioner's expenses in connection with the derivative proceedings


[35]
Towards the end of the proceedings before me, I granted the petitioner leave to amend the prayer of a petition in the following terms (see No.25 of Process):

"and to ordain [the company] (one) to pay the petitioner all of the petitioner's legal expenses incurred in respect of or connected with the action to be brought in the name of the petitioner against [Mr Black and SJB] ("the forthcoming action") from the date the court grants permission for the forthcoming action to be brought up to the closing of the record, such expenses to be taxed on an agent and client, client paying basis and (two) to indemnify the petitioner against all awards of expenses made against the petitioner in the forthcoming action up to the closing of the record, under reservation that at the closing of the record or any time thereafter during the dependence of the forthcoming action the petitioner is entitled to apply to the court for an extension of such an order or orders for such a period or to such a stage in process as to the court shall seem proper"

Mr Barne explained that this form of order was based on that made in English proceedings, following the decision in Wallersteiner v. Moir (No.2) and subsequent cases. He submitted that the court in Scotland has power to make such an order by virtue of the terms of s.266(5) of the Act, which provides that the court may grant the application "on such terms as it thinks fit". The proceedings for leave were the appropriate proceedings in which the order should be made; it was not competent to make such an order in the derivative proceedings themselves. The reservation at the end of the passage inserted by amendment was intended to enable the court hearing the petition to give to the court seised of the derivative action the power to carry forward any such order for expenses to the end of the derivative proceedings. The need for this was caused by the fact that in Scotland, unlike in England, the application for leave to raise derivative proceedings had to be made in a separate action from the derivative proceedings themselves.


[36]
Mr Motion argued that the court had no jurisdiction to make such an order. The power to grant the application on such terms as the court thinks fit did not confer any such jurisdiction on the court. Such wording was apt only to enable the court to impose restrictions on the grant of leave. The approach in England and Scotland was materially different. So far as the authorities showed, the court in Scotland had never made such an order before. In those circumstances, Parliament would have made it clear if it had intended that the Scottish courts should have this new power. Mr Motion went on to submit, under reference to certain cases and books on Court of Session practice, that an order for expenses on an agent client basis should only be made in certain limited circumstances which were not applicable here. The court should not innovate but should leave it to the Rules Committee to consider.


[37]
I am satisfied that there is such a power. It would, I accept, be better if the position were governed by Rules of Court. However, it seems to me that the power to impose terms when granting leave to bring derivative proceedings must give the court power to make an order of the sort which the petitioner seeks and, in the absence of Rules of Court, I must do my best to fashion the appropriate order. Such an order was, it seems, not uncommon in England before the coming into force of the 2006 Act. The provisions of the Act dealing with England do not expressly give power to the English courts to make such orders, but I do not think that it can have been intended to remove such power as they had. As I have noted, it was the intention of the Scottish Law Commission that the law and procedure in Scotland and England should be similar and the similarity between the two sets of statutory provisions reflects this. That is not surprising in company law matters. For the reasons set out in the English cases to which I have referred, there are compelling reasons for making an order of this sort in the appropriate case. Against this background, it seems to me that Parliament must have intended such a power to be included within the terms which the court could impose upon the grant of leave. If an order of this sort is to be made, it is obviously right that the order for expenses should be on an agent client, client paying basis. The justification for a full indemnity is explained convincingly by Lord Denning MR and Buckley LJ in Wallersteiner v. Moir (No.2). The principle is quite different from that referred to in the cases about an award, as between parties to a litigation, of expenses on an agent client basis.


[38]
The only difficulty is a procedural one. Whereas in England the court seised of the derivative action gives leave to continue it and can itself deal with questions of expenses (as between the minority shareholder and the company) on a staged basis, it might be thought that in Scotland the court hearing the petition for leave could have no further power once leave is given. However, at the stage of hearing the petition for leave, the court may be understandably reluctant to order that the company indemnify the minority shareholder in respect of all his expenses of prosecuting the derivative action until proof or even beyond - it may be that at a later stage, for example after the closing of the record, there will be valid arguments about whether it is reasonable, in light of everything that has emerged (including documents recovered under a Specification of Documents), for the pursuer to continue the derivative action at the expense of the company rather than at risk to himself. The practical solution suggested by Mr Barne is that the court hearing the petition and granting leave should give power to the court hearing the derivative action to deal with expenses as between the minority shareholder (the pursuer in the action) and the company. I am not sure that it is possible to confer jurisdiction in this way. The power to impose terms is a power attached to the application for leave in the action begun by petition. It is doubtful whether it would be competent for the court seised of the derivative action to make an order in that action that the pursuer be indemnified in respect of his expenses by his principal (the company), even if for formal reasons the company were joined as a defender to that action. However, there is another way. It seems to me that the order granting leave to raise derivative proceedings need not dispose entirely of the petition. In so far as the prayer is for an order for expenses, the court, if it were so minded, could make an order that the company pay the expenses of the pursuer in the derivative action (and indemnify him against any order for expenses) on an agent client, client paying basis, up until the appropriate stage in the derivative action itself, say, the closing of the record; and could in the same interlocutor continue the petition for further consideration of that part of the prayer, thereby enabling the petitioner to make further applications in the petition process. Theoretically there may be difficulties, in that if the court hearing the petition did not have before it the process in the derivative action it might not feel sufficiently informed about the conduct of the derivative action to judge whether that action was being continued reasonably and ought to continue to be funded by and at the risk of the company. But the obvious solution is for parties to ensure that the two processes come before the court on the hearing of any such motion. In the present case it is intended that the derivative action be commenced in the commercial court. There is no difficulty in ensuring that an application in the petition proceedings for further orders concerning expenses as between the minority shareholder and the company be brought on at the same time as a preliminary or procedural hearing in the derivative action.


[39]
Accordingly, I propose to grant leave to the petitioner to raise the derivative proceedings and I propose to order the company, Castlecroft Securities Limited, (i) to pay the petitioner's legal expenses incurred in respect of or connected with the said proceedings on an agent client, client paying basis from the date of this order until the procedural hearing in the commercial court in the said proceedings and (ii) to indemnify the petitioner against all awards of expenses made against him in the said proceedings up until said procedural hearing, reserving to the petitioner the right, if so advised, to apply in this petition for a similar order to cover further stages of the derivative proceedings.

Postscript


[40]
This case has revealed some of the difficulties in the provisions of the 2006 Act dealing with derivative proceedings in Scotland. In particular, the requirement for leave to raise proceedings, rather than to continue proceedings which have already been raised, appears to require the commencement of separate leave proceedings. This has obvious disadvantages and no obvious advantages. I have referred to some of the disadvantages, such as the risk that the derivative action may prescribe if leave proceedings are protracted and the difficulties (albeit not insuperable) in the way of the court making stages orders for expenses as between the minority shareholder and the company. There may be others. I would encourage the Rules Committee to address this problem and to consider making Rules of Court specifically to deal with applications to raise derivative proceedings under the Act. I do not see why the Rules of Court should not be able to devise a mechanism whereby the application for leave was by Note or some other proceeding ancillary to the proposed derivative action itself, so that any order granting leave and imposing terms (such as those concerning expenses as between the minority shareholder and the company) would be an order in the derivative action itself if leave were given. It seems to me also that, having given leave at the initial stage, the court ought, upon a motion being made in the derivative action and where it can be said that the tests in ss.266 and 268 are no longer met - i.e. where there has been a change of circumstances or where the pleadings or other documents make it plain that the minority shareholder is no longer acting reasonably or bona fide in continuing the action on behalf of the company - to be able to say that the pursuer ought no longer be entitled to continue the action. But that may require primary legislation.


BAILII:
Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII
URL: http://www.bailii.org/scot/cases/ScotCS/2009/2009CSOH20.html