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England and Wales High Court (Chancery Division) Decisions
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Cite as:  EWHC 5 (Ch)
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BUSINESS AND PROPERTY COURTS IN MANCHESTER
INSOLVENCY AND COMPANIES LIST (Ch D)
IN THE MATTER OF THE HUT GROUP LIMITED
AND IN THE MATTER OF THE COMPANIES ACT 2006
1 Bridge Street West
Manchester M60 9DJ
B e f o r e :
| ZEDRA TRUST COMPANY (JERSEY) LIMITED
|- and -
|THE HUT GROUP LIMITED & OTHERS
Lance Ashworth QC and Dan McCourt Fritz (instructed by Gowling WLG (UK) LLP) for the Respondents
Hearing date: 23rd September 2019
Crown Copyright ©
HH Judge Eyre QC:
The Approach to be taken to the Striking Out of Claims or of Particular Allegations.
"The claimant does not have to plead primary facts which are only consistent with dishonesty. The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact "which tilts the balance and justifies an inference of dishonesty". At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge."
Is the Petition an Attempt to circumvent the Restrictions on bringing Derivative Claims?
"…proceedings in England and Wales or Northern Ireland by a member of a company–
(a) in respect of a cause of action vested in the company, and
(b) seeking relief on behalf of the company."
"… may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both)."
"A member of a company may apply to the court by petition for an order under this Part on the ground–
(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial."
"(1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.
(2) Without prejudice to the generality of subsection (1), the court's order may–
(a) regulate the conduct of the company's affairs in the future;
(b) require the company–
(i) to refrain from doing or continuing an act complained of, or
(ii) to do an act that the petitioner has complained it has omitted to do;
(c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;
(d) require the company not to make any, or any specified, alterations in its articles without the leave of the court;
(e) provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company's capital accordingly."
"Mr Oliver asked: "If misconduct in the management of the company's affairs does not without more constitute unfairly prejudicial management. what extra ingredient is required? In my judgment the distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it. It is a matter of perspective. The metaphor is not a supermarket trolley but a hologram. If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong the complaint is one of misconduct simpliciter. There is no need to assume the burden of alleging and proving that the acts or omissions complained of evidence or constitute unfairly prejudicial management of the company's affairs. It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong. In such a case it is necessary to assume that burden, but it is no longer necessary to establish that the acts or omissions in question were unlawful, and a much wider remedy may be sought."
"A good illustration of the distinction is provided by Re a Company No. 5287/85 (1985) 1 BCC 99.586. In that case the petitioners, who were minority shareholders, alleged that the respondent. who was the majority shareholder. had disposed of the company's assets in breach of his fiduciary duty to the company and in a manner which was unfairly prejudicial to the interests of the petitioner. Hoffmann J refused to strike out the petition, holding that the fact that the petitioners could have brought a derivative action did not prevent them seeking relief under sec. 459.
Again, I respectfully agree. The very same facts may well found either a derivative action or a sec. 459 petition but that should not disguise the fact that the nature of the complaint and the appropriate relief is different in the two cases. Had the petitioners' true complaint been of the unlawfulness of the respondent's conduct, so that it would be met by an order for restitution, then a derivative action would have been appropriate and a sec. 459 petition would not, but that was not the true nature of the petitioners' complaint. They did not rely on the unlawfulness of the respondent's conduct to found their cause of action; and they would not have been content with an order that the respondent make restitution to the company. They relied on the respondent's unlawful conduct as evidence of the manner in which he had conducted the company's affairs for his own benefit and in disregard of their interests as minority shareholders; and they wanted to be bought out. They wanted relief from mismanagement, not a remedy for misconduct."
"As a general rule, in my opinion, the court should not in a s.168A petition make an order for payment to be made by a respondent director to the company unless the order corresponds with the order to which the company would have been entitled had the allegations in question been successfully prosecuted in an action by the company (or in a derivative action in the name of the company). If the order does not so correspond then, either the company will have received less than it is entitled to, in which case it will be entitled to relitigate the issue in an action against the director for the balance, or the company will have received more than it was entitled to, in which case a clear injustice to the director will have been perpetrated. Nor, in my opinion, should the court allow a prayer in the petition for payment by the respondent director of compensation or of restitution to the company to stand unless it is clear at the pleading stage that a determination of the amount, if any, of the director's liability at law to the company can conveniently be dealt with in the hearing of the petition. In any other case, in my opinion, if the allegations against the director are proper to be relied on as evidence of unfairly prejudicial conduct, the appropriate relief to be sought would be an order under s.168A(2)(b) for a derivative action to be brought for the recovery of the sum legally due. It would be proper for the company to express its views as to whether it would be in its interests for such an action to be brought."
Are Parts of the Petition impermissible Attempts to recover Reflective Loss?
"38. It will thus be seen from the speeches in Johnson v Gore Wood that where there is a breach of duty to both the shareholder and the company and the loss which the shareholder suffers is merely a reflection of the company's loss there is now a clear rule that the shareholder cannot recover. That follows from the graphic example of the shareholder who is led to part with the key to the company's money box and the theft of the company's money from that box. It is not simply the case that double recovery will not be allowed, so that, for instance if the company's claim is not pursued or there is some defence to the company's claim, the shareholder can pursue his claim. The company's claim, if it exists, will always trump that of the shareholder.
"41. However, it is apparent that there are limits to the application of the no reflective loss principle. The principal limit is that the no reflective loss principle does not apply where the company has no claim and hence the only duty is the duty owed to the shareholder (Lord Bingham's proposition (2)). Likewise it does not apply where the loss which the shareholder suffers is additional to and different from that which the company suffers and a duty is also owed to the shareholder: see Lord Bingham's proposition (3) and see Heron International v Grade  BCLC 244, as explained by Lord Millett in Johnson v Gore Wood . There may well be other limits."
"On behalf of Mr Sevilleja, Mr David Lewis QC submitted that what emerges from these authorities is that there is a four-fold justification for the rule against reflective loss. I agree with that analysis. The four aspects or considerations justifying the rule which emerge from the authorities, in particular Lord Millett's speech in Johnson v Gore Wood, are: (i) the need to avoid double recovery by the claimant and the company from the defendant: see per Lord Millett at 62E-F quoted at  above ; (ii) causation, in the sense that if the company chooses not to claim against the wrongdoer, the loss to the claimant is caused by the company's decision not by the defendant's wrongdoing: see per Lord Millett at 66D-F quoted at  above and Chadwick LJ in Giles v Rhind at ; (iii) the public policy of avoiding conflicts of interest particularly that if the claimant had a separate right to claim it would discourage the company from making settlements: see per Lord Millett at 66F-G again quoted at  above; and (iv) the need to preserve company autonomy and avoid prejudice to minority shareholders and other creditors. The point about company autonomy is made by Lord Millett at 66H-67A quoted at  above and the point about protecting minority shareholders and other creditors is made by Arden LJ at  in Johnson v Gore Wood (No 2) quoted at  above."
The Pleading of the Allegations of Bad Faith and/or Improper Purpose.
Are Parts of the Petition to be struck out as hopeless or as seeking Relief which cannot be granted?
"A petition under sec. 459 is not analogous to litigation in which the issues raised affect only those against whom allegations are made by the plaintiff. A closer analogy is an administration action, where all beneficiaries having an interest in the relief sought should be made parties or represented. The practice that has so far been followed in the Companies Court is to require that all members of the company whose interests would have been affected by the misconduct alleged or who would be affected by an order made by the court under the very wide powers conferred by sec. 461 are to be made respondents to a petition or served with it.
In practice this means that in the case of a small, private company every member ought to be joined. If, as is usually the case, the relief sought is the purchase of the petitioner's shares by the respondents against whom allegations of unfairly prejudicial conduct are made, or the purchase of their shares by the petitioner, other shareholders would be affected if the articles contain pre-emption provisions which would be overridden by the purchase, or if the balance of the voting rights might be affected to the detriment of other members. If the relief sought is the purchase of the petitioner's shares, or of the shares of those members against whom allegations of unfairly prejudicial conduct are made, by the company, the balance of voting rights would, again, almost inevitably be affected. Clearly, if a winding-up order is sought or an order regulating the conduct of the company's affairs in the future, those entitled to vote on a resolution for the winding-up of the company or the appointment of directors, are entitled to be heard.
There may be occasions where it is unnecessary to join all the members of a company, for instance if the articles contain no pre-emption provisions and if some of the members are mere investors who have taken no part in the formation or management of the company-a situation which might arise, for instance, in the case of a public listed company, the affairs of which are under the de facto control of a small group of shareholders. It may be that in such a case it would be unnecessary to make all the members respondents, or to serve the petition on all of them, and that it would be sufficient that they be given notice of the petition so that they may apply to be joined if they so wish. Under the Companies (Unfair Prejudice Applications) Proceedings Rules 1986 (S.1. 1986 No. 2000) on the first hearing of a petition the court is required to give directions as to the service of a petition on any person who has not been made a respondent. If there is any doubt as to whether a member or director ought to be made a respondent to, or served with a petition or given notice of the petition, that doubt can be resolved at an early stage."