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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Milestar Ltd, Re [2023] EWHC 2153 (Ch) (08 September 2023) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2023/2153.html Cite as: [2023] EWHC 2153 (Ch), [2024] Costs LR 171 |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES LIST (ChD)
DERIVATIVE CLAIM
IN THE MATTER OF MILESTAR LIMITED
AND IN THE MATTER OF THE COMPANIES ACT 2006
Fetter Lane London EC4A 1NL |
||
B e f o r e :
(sitting as a Deputy High Court Judge)
____________________
HITESH GANDESHA | Claimant | |
-and- | ||
NARENDRA GANDESHA | ||
AMIT GANDESHA AND VINESH GANDESHA | ||
(as executors of SURENDRA KUMAR GANDESHA deceased) | ||
MILESTAR LIMITED | Defendants |
____________________
ANNA MARKHAM (instructed by Charles Russell Speechlys LLP) for the First and Second Defendants
Hearing date: 26 July 2023
____________________
Crown Copyright ©
Nicholas Caddick K.C. (Deputy High Court Judge):
Introduction
Background
The present claims
The bank mandate claim
The cash claim
The directors' loan account claim
a. Payments of £50,000 made to Narendra and Surendra on 17 August 2017 and on 2 January 2018 – i.e. a total of £100,000;
b. Payments of £15,000, £10,000 and £11,000 made to Narendra and Mrs KN Gandesha on, respectively, 4 February 2016, 8 September 2017 and 8 September 2017 – i.e. a total of £36,000; and
c. A payment of £50,000 made to Surendra on 4 February 2016.
The trust income claim
Issue estoppel/res judicata
The Law
The first stage
"(2) If it appears to the court that the application and the evidence filed by the applicant in support of it do not disclose a prima facie claim for giving permission … , the court -
(a) must dismiss the application, and
(b) may make any consequential order it considers appropriate
(3) If the application is not dismissed under subsection (2), the court –
(a) may give directions as to the evidence to be provided to the company, and
(b) may adjourn the proceedings to enable the evidence to be obtained."
The second stage
Section 263 – matters the court must consider in deciding whether to grant permission
Section 263(2) – mandatory bars to the grant of permission
"(2) Permission (or leave) must be refused if the court is satisfied–
(a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim, or
(b) where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company, or
(c) where the cause of action arises from an act or omission that has already occurred, that the act or omission–
(i) was authorised by the company before it occurred, or
(ii) has been ratified by the company since it occurred."
"172. Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to —
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company…"
"85. As many judges have pointed out (e.g. Warren J in Airey v Cordell [2007] BCC 785, 800 and Mr William Trower QC in Franbar Holdings Ltd v Patel [2009] 1 BCLC 1, 11) there are many cases in which some directors, acting in accordance with section 172, would think it worthwhile to continue a claim at least for the time being, while others, also acting in accordance with section 172, would reach the opposite conclusion. There are, of course, a number of factors that a director, acting in accordance with s.172, would consider in reaching his decision. They include: the size of the claim; the strength of the claim; the cost of the proceedings; the company's ability to fund the proceedings; the ability of the potential defendants to satisfy a judgment; the impact on the company if it lost the claim and had to pay not only its own costs but the defendant's as well; any disruption to the company's activities while the claim is pursued; whether the prosecution of the claim would damage the company in other ways (e.g. by losing the services of a valuable employee or alienating a key supplier or customer) and so on. The weighing of all these considerations is essentially a commercial decision, which the court is ill-equipped to take, except in a clear case.
86. In my judgment therefore… section 263(2)(a) will apply only where the court is satisfied that no director acting in accordance with section 172 would seek to continue the claim. If some directors would, and others would not, seek to continue the claim the case is one for the application of section 263(3)(b). Many of the same considerations would apply to that paragraph too."
"14. In short, therefore, if the court forms the view that no director acting in accordance with his or her duties under section 172 would seek to continue the claim, the court must refuse permission to continue the derivative claim. If, however, the above threshold is met, the court will go on to consider the various matters set out in the second important sub-paragraph, section 263(3)."
The matters to be taken into account – s.263(3)
"(3) In considering whether to give permission (or leave) the court must take into account, in particular–
(a) whether the member is acting in good faith in seeking to continue the claim;
(b) the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to continuing it;
(c) where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be–
(i) authorised by the company before it occurs, or
(ii) ratified by the company after it occurs;
(d) where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company;
(e) whether the company has decided not to pursue the claim;
(f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company.
"…if the case seems very strong, it may be appropriate to continue it even if the likely level of recovery is not so large, since such a claim stands a good chance of provoking an early settlement or may indeed qualify for summary judgment. On the other hand, it may be in the interests of the Company to continue even a less strong case if the amount of potential recovery is very large. The necessary evaluation, conducted on, as Lewison J observed, a provisional basis and at a very early stage of the proceedings, is therefore not mechanistic."
"25. Drawing the above authorities together, it seems to me that the position in relation to section 263(2)(a) and section 263(3)(b) - and the approach to be taken by the court when considering the position of the notional director acting in accordance with his or her duties under section 172 - can be summarised as follows:
(1) The strength of the proposed claim is important. While there is no particular threshold test, at the very least a prima facie case (which if unanswered would entitle the company to judgment) is required.
(2) The strength of the proposed claim is not, however, determinative - there are other (often quasi-commercial) factors to be taken into account too. These may include (but are not limited to) the size of the claim, the cost of bringing the claim, the risk of an adverse costs orders, and the prospects of recovery if successful. For example, a claim which is very strong on the merits but where there is virtually no prospect of recovery may well fail to cross the line; a case which is weaker but of huge financial or other significance, by contrast, may well in the balancing exercise be able to cross that line.
(3) In carrying out the above exercise, the court should not embark on a mini trial. Instead, it should form a view on the basis of the evidence before it at the hearing - which is likely to be more than the evidence which was before the court at the time of the first (on paper) stage consideration."
The issues raised in the present case
a. That permission must be refused because this is a case where no director acting in accordance with his duties under s.172 would continue the claims (s.263(2)(a)).
b. That permission should be refused because:
i. A director acting in accordance with s.172 would attach little or no importance to continuing these claims (s.263(3)(b));
ii. Hitesh is not acting in good faith in seeking to continue the claims (s.263(3)(a)); and
iii. The acts in respect of which the claims are brought give rise to a cause of action that Hitesh could pursue in his own right rather than on behalf of the Company (s.263(3)(f)).
The present case – the s.172 factors
The bank mandate claim
The cash claim
The directors' loan account claim
The trust income claim
Conclusion on the s.172 factors
Is Hitesh acting in good faith – s.263(3)(a)
Is there a cause of action that Hitesh could pursue in his own right – s.263(3)(f)
Indemnity
The authorities
"(1) The court may order the company … for the benefit of which a derivative claim is brought to indemnify the claimant against liability for costs incurred in the permission application or in the derivative claim or both.
(2) If the claimant seeks an order that the defendant company … indemnify the claimant against liability incurred in the permission application or the claim, this should be stated in the permission application or claim form or both."
"Once the court has reached the conclusion that the claim ought to proceed for the benefit of the company, it ought normally to order the company to indemnify the claimant against his costs."
However, as set out below, the position is somewhat more complex than simply saying that where a court is satisfied that permission should be given, it should also then make an order for an indemnity (i.e. pre-emptively) rather than leaving the issue to be determined after the trial of the claims.
"The judgment of Walton J. in Smith v. Croft [1986] 1 W.L.R. 580 contains a useful reminder of the dangers of too easily making orders which allow minority shareholders to litigate at the cost of the company."
On this basis, as Lord Reed noted, Hoffman LJ had:
"… approved an approach whereby, rather than granting a blanket indemnity to cover the whole of the future litigation, the court made an indemnity order covering only a particular stage of the litigation, on the basis that the matter would be reviewed at the end of that stage."
"59. A shareholder who is given leave by the court to raise derivative proceedings under section 265[4] does so "in order to protect the interests of the company and obtain a remedy on its behalf". Ex hypothesi, the court has decided, after considering a range of factors including the shareholder's good faith, that it is reasonable that he should raise the proceedings in the interests of the company and on its behalf. Unless leave has been given on a staged basis, however - that is to say, unless leave is granted on terms which enable the court to keep under review the reasonableness of the continuation of the proceedings - the court cannot presume that it is necessarily reasonable that the shareholder should continue with the proceedings after raising them. The apparent strength of the shareholder's case may diminish, for example, as more becomes known about the relevant facts; or a reasonable offer in settlement may be made. Since the shareholder is seeking a remedy on the company's behalf, he ordinarily falls within the scope of the general principle which we have discussed, and is entitled to be indemnified by the company in respect of liabilities and expenses reasonably incurred in the interests of the company; but, prima facie, it cannot be predicted whether any particular liability or expense incurred in connection with the derivative proceedings should be the subject of such an indemnity.
60. We have said that the shareholder raising derivative proceedings "ordinarily" falls within the scope of the relevant principle because the court's power to grant leave on terms enables it to impose terms which modify or exclude the application of that principle. It is possible to conceive of circumstances in which the court might hesitate to grant leave if the effect of doing so were to require the company to indemnify the member even if the proceedings proved to be unsuccessful. An example of such circumstances might be a case where the shareholder had ample means and the company was impecunious (as, for example, in the Australian case of Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 1007 ). It would be open to the court to grant leave in such a case on a basis which protected the company's position: for example, by limiting the extent of any indemnity to the amount, if any, which was recovered by the company as a result of the derivative proceedings.
61. In general, however, we have no difficulty accepting that a shareholder who is the pursuer in derivative proceedings is, for the purposes of expenses, in an analogous position to that of a trustee or an agent, and that the court should therefore, in appropriate circumstances, order that he should be indemnified by the company in respect of his own expenses, to the extent that they are not recovered from other parties to the derivative proceedings, and in respect of any awards of expenses which may be made against him in favour of other parties to those proceedings."
"It is in those proceedings, in particular, that an assessment can best be made of whether there has been a material change of circumstances since leave was granted, such that it has ceased to be reasonable that the derivative proceedings should be continued at the company's expense. The judge in the leave proceedings can discuss more freely the merits of the derivative proceedings while those proceedings are ongoing, and can take into account matters, such as an offer in settlement, to which the judge in the derivative proceedings could only have regard after those proceedings had been concluded. It is also possible to conceive of circumstances in which it might be appropriate to make an order in relation to an indemnity which was not related to any award of expenses, or any specific procedural step, in the derivative proceedings: the shareholder might, for example, run out of funds and require to be indemnified in order to continue (as in Wallersteiner v Moir (No.2) and McDonald v Horn ).
68. If a finding is to be made, at the stage when leave is granted, as to the shareholder's entitlement to be indemnified in respect of liabilities and expenses which may be incurred in the future, the terms in which the finding is made should reflect the fact that there is a limit to the extent to which the court can assess, in advance, the reasonableness of his having incurred any particular liability or expense, and therefore the appropriateness of an indemnity. The dangers of the court's writing a blank cheque for the shareholder as to the amount of expenses which he can incur in the derivative proceedings are obvious. That has a number of implications. First, the court must be satisfied that it is necessary for such an order to be made prospectively, rather than the shareholder's entitlement to indemnification being considered after the expenses have been incurred. We do not however doubt that there may in appropriate cases be compelling reasons for finding the member entitled to be indemnified at the stage when leave is granted: in particular, as Buckley LJ explained in Wallersteiner v Moir (No.2) at page 399, minority shareholders may require the assurance of a prospective order so that they are not deterred from bringing derivative proceedings, where such proceedings ought to be brought, by the risk of incurring not only their own expenses but also a liability for the expenses of the defenders. Secondly, in cases where a prospective finding is appropriate, it makes sense for such findings to be made on a staged basis: that is to say, a finding can be made in respect of liabilities and expenses incurred up to a specified stage in the derivative proceedings, reserving leave to the shareholder to apply in the leave proceedings for a further finding once that stage has been reached. The appropriate stages will depend upon the circumstances….
Although it may be desirable that the member should be able to embark on the derivative proceedings in the confident expectation that he will be indemnified against outlays and liabilities which have been reasonably incurred, the court cannot definitively prejudge the question whether all his future outlays and liabilities have been so incurred. A reasonable offer in settlement, for example, might be made at any time, rendering the further prosecution of the derivative proceedings unreasonable. Even if leave were granted on a staged basis, the possibility of a material change of circumstances occurring during the intervening period could not be excluded. For these reasons, it appears to us that a prospective finding that the shareholder is entitled to be indemnified should not be unconditional, but should reserve leave to the company to apply for the finding to be modified in the event of a material change of circumstances." (emphasis added).
"74. In short, although Wishart upheld the general principle that a minority shareholder should have a costs indemnity from the company after trial when he has properly brought a claim in the company's interest, it did not hold that he should, either of right or even normally, be granted a pre-emptive indemnity to this effect …. On the contrary, it appears to have suggested a test, for a pre-emptive order, that such order should be "necessary" (see paragraph 68, recited above). Although the specific context in which this was said was whether an order should be made at the same time as permission to sue is granted, there is nothing to suggest that a different principle is supposed to apply at a later pre-trial stage of the proceedings".
"69. The later authorities show that the court should exercise considerable care when deciding whether to order a pre-emptive indemnity. The court should have a high degree of assurance that such an indemnity would be the proper order to make following a trial on the merits of the claim. In the present case, Jat will plead a defence of limitation to the claim to recover the payments made to Torex. Inder will allege that Jat was dishonest. I have held that Inder has shown a prima facie case of dishonesty but the claim might fail. If it emerges at the trial that Jat was not dishonest and an order for costs is made in favour of Jat against Inder, it is not obvious that in all cases the trial judge would award Inder an indemnity in relation to the adverse order for costs. Similarly it would not be obvious in such a case that Inder should have an indemnity for his own costs. Conversely, if the claim succeeded and Jat was held to have been dishonest, then Inder could expect to obtain an order for costs against Jat and an indemnity from the relevant company in relation to any reasonably incurred costs which for some reason were not recovered from Jat. Inder would have that expectation even without the certainty which he would have pursuant to a pre-emptive order for an indemnity."
The present case
Conclusion
a. Subject to (c) below, I propose to give the Claimant permission pursuant to s.261(4)(a) of the 2006 Act to continue the derivative action.
b. Again, subject (c) below, I propose to order pursuant to CPR r.19.19(1) that the Company is liable to indemnify the Claimant against liability for costs incurred to date in the permission application and in the derivative action.
c. The above permission and indemnity be limited to the period up to and including the exchange of witness evidence in the derivative action.
d. Subject to the above, the application for permission and for an indemnity be adjourned with liberty for:
i. The Claimant to apply for an extension of the grant of permission and/or of the order for an indemnity;
ii. The Defendants to apply to vary or revoke the above grant of permission and/or order for an indemnity on the basis of a material change in circumstances.
Note 1 Certainly, in preparing the partnership accounts referred to below, the same accountants had a separate sheet for the director’s loan account figure which was then included in the overall “other creditors” figure contained in the main body of the accounts - see paragraph [21] below. [Back] Note 2 Which sum was then included in the global “other creditors” figure of £432,491 which appears in the main partnership accounts. [Back] Note 3 For example, whether the act complained of was or was likely to be authorised or ratified (s.263(b) and (c), s.263(3)(c) and (d) quoted below) and, probably, whether the applicant was acting in good faith (see s.263(3)(a), also quoted below). [Back] Note 4 The Scottish equivalent to s.260 [Back] Note 5 In Wishart it was until the procedural hearing in the derivative proceedings, . [Back]