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OUTER HOUSE, COURT OF
SESSION
[2009] CSOH 20
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P385/08
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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
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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.
