Dereivative Claim - pbm q PDF

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COMPANY – DERIVATIVE CLAIM – CHECKLIST PROBLEM QUESTIONGeneral Structure:Within a company: - Majority shareholder also a director - Minority shareholderDirector/Majority shareholder commits a breach – often S - From past exam paper: wrong account check before acquiring share of another company. Seve...

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COMPANY – DERIVATIVE CLAIM – CHECKLIST PROBLEM QUESTION

General Structure: Within a company: - Majority shareholder also a director - Minority shareholder Director/Majority shareholder commits a breach – often S174 - From past exam paper: wrong account check before acquiring share of another company. Several negligent actions, forget to pay insurance then fire. This breach harm the company, cause a drop the value of the share of the company, minority shareholder unhappy. Meeting at request minority shareholder. Majority shareholders vote not to sue director for breach (either by virtue S1157 or ratification breach with S178) Optional: - Minority shareholder is ejected of the meeting, majority shareholders argu its for best interest company. - personal/familial connection between the shareholder Optional: minority shareholder provided a loan (of £100,000.00) to the company, in exchange majority shareholder/director provided a personal guarantee Advise: 1. If minority shareholder can raise a personal claim against the director/majority shareholder 2. If minority shareholder can raise a derivative claim against director/would he obtain court permission to continue its claim.

1. Personal claim of the minority shareholder against the director 1. General rule: The shareholder can’t sue a director in personal action S170(1) Director owns duty to the company Reflective loss: Breach duty director, harm the company, cause value of the company’s share to drop, as a reflection harm the shareholders. Main authority – Prudential [1982] – shareholder can’t sue for reflective loss, the duty is solely owned to the company Gardener V Parker [2004] – apply to claim brought by shareholder in is capacity of creditor Sevilleja V Marex [2018] – recent authority, restates the rule and expend it – now applied to all creditor, not only shareholder acting as creditor. (trendy case, a 2020 judgment ringing clarification too) 2. Exceptions to the rule – When can shareholder brings a personal claim: Johnson V Gorewood [2000], 2 exceptions:  1. I f company suffered breach of director’s duties but has no cause of actions to sue to recover this loss (seems rare)  2. When shareholder suffered of a separate and distinct loss from the breach of director’s duties than the one suffered by the company = NOT a reflective loss. Then, each may sue to recover the loss, but it’s an independent recover, the shareholder can’t recover the loss suffered by the company and vice-versa (avoid double compensation) => The minority shareholder must establish that some duties are owned to him personally. Some ‘parallel duties’/special duty/special factual relationship duties must be owned. 2 main circumstances when happen:  Duty to care in tort, need sufficient close relationship o Alen V Hyatt – when director acted as agent of the shareholder  Duty owned because separate contract between director and shareholder o Platt V Platt – sperate contract director/shareholder Coleman V Myer, need to adopt a fact sensitive approach, Woodhouse J, para 325:  Not possible to establish a general test, take in account the fact  Guidance/influential factors: o Dependence upon info or advice o Existence of a relationship of confidence (check link persons; family, friends, …) o Significance of the transaction for one party o The extent of positive act taken by director to promote it (actions taken to promote its decision that create a breach)

2. Derivative claim Foss V Harbottle – the proper claim rule. Where a company has suffered detriment/loss it’s to the company to pursue the claim. Early stage of company law. View taken, the shareholder are in effect the company. H: confirm the concept of legal personality of the company. 1.In principle possible to pursue a derivative claim – 1st stage S260, S261, and S263 – (262 can be ignored) . S260(1) – defines what is a derivative claim - a claim by a member of the company, on behalf of the company; and seeking relief on behalf of the company. If claim is successful, the ⓜ return to the company, there is no direct benefit for the claimant, but the expense and time spend are for the claimant. => In practice, derivative claim isn’t an attractive remedy. State it in the exam, show some analysis. S260(3) – scope of action. Breach of duty is the more likely to be linked – especially S174 ‘A derivative claim under this Chapter 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)’ Can be brought in respect of any breach, no need to be a fraud – different with previous common law action S260(4)- - cause of action may arise before or after the claimant become a member of the company. State only if relevant. 2. BUT need court permission to continue the claim – 2nd stage – full permission hearing S261 – the claimant need permission to the ct to continue the claim. A procedure gateway, enable the court to dismiss some claim under certain situation. A second disadvantage to use derivative claim as a remedy, increase the cost and the risk of being unsuccessful. S263(2) – 3 mandatories bars for the refusal of permission, no discretion (a) – A person acting in accordance with S172 (duty to promote success of the company) would not continue the claim o Hypothtical Director – Iesini’s factor, Lewison J, check if no reasonable director’ under his duty of S172 would continue the claim. Need to take in account/Factor  The size of the claim  The strength of the claim  The cost of the proceeding

The company’s ability to find the proceeding The ability of the potential d to satisfy the judgment The impact on the cy if It lost the claim and had to pay not only its own cost by the defendant’s cost as well  Any disruption to the company’s activities while the claim is pursued  whether the prosecution of the claim would damage the company I other way (ex: losing service of a valuable employee, suppliers) o Applied in Franbar Holding Plc o Kleanthous V Paphiti – judges held that the board of director ( = advise NEDS) was better placed that them to evaluate impact court proceeding – court refused to continue claim.   

(b) – if the action/omission hasn’t happened yet, but has been approved by the company (c) – when the action has already occurred but (i) has been authorised by the company before he did occur or (ii) has been ratified by the company since it has occurred o BUT 239 – is the ratification valid? o 239(1) – this section concerns the includes breach of director duties o 239(4) – resolution is passed, if obtain the necessary majority without the vote of the director or a person connected to him under S252 o 239(5)(b) – apply to former director (c) to shadow director S263(3) – discretionary bars - If not refused by S263(2), at court discretion/discretionary factors, will take inn account; (a) – if member (minority shareholder) is acting in good faith will continuing the claim (b) – if member (minority shareholder) is acting in accordance with S172 (duty to promote success of the company) (c ) – if action hasn’t happen yet, if would be authorised/ratified by company (d) – if action already happen, chance that it would be ratified by the company (e) – if company has decided not to pursue the claim → Kleanthous V Paphiti (f) – if claim is raised for the claim owns right rather than the company’s ones. - factor applied in Mission Capital Plc Franbar Holding V Patel – Mission Capital Plc – check if better for bring action under unfair prejudice (S994) – these cases advises that yes Wishart V Castelcroft Securities Ltd – differ – claim successful S263(4) – Court should have particular regard that the claim has a personal interest (direct or indirect) with this matter → ex: ex-husband raise a claim against ex-wife which his the director of the company.

3. Who would pay legal proceeding Action brought by the claimant on behalf on the company, he has to engage all the cost. The Civil Procedure (Amendment) Rules 2007 – R.19.9E – pre-emptive cost order – the court may order the company to indemnify the claimant against any liability of the loss. BUT only if derivative claim is continued => THE LOSER PAY PRINCIPLE Wallersteiner’s order – shareholder who brought the claim may be indemnify provided that he acted reasonably in bringing the action – court very reluctant to apply this. Especially when derivative claim may be brought ‘tactically’ to secure the buy out as in Bhullar

Some pieces for an essay: Prudential – modern way – what is imp.t reflective loss – where the company suffer loss as a consequence of wrong doing, its value reduces, reflectively the value of the share reduces.  I: When that loss of value is cause by a wrongdoing 

A: Why a shareholder who has reflectively loss value over its share, can’t rise a claim



H: The company has to raise the claim, the original loss is in the value of the company.

Prudential relevant for a pbm question or a specific pbm question over reflective loss otherwise not relevant. (=not much relevant for an essay) Marex Financial Ltd – where a 3rd party (not a shareholder) has suffer loss from a wrongdoing. A 2020 case, very recent, might be interesting to state it in the essay. Marex concern a creditor of a company, how has lent ⓜ to the company. The company has to repay the creditor. I: If an insolvency, can the creditor pursue a claim in relation to the loss caused by the wrongdoing? (check winding up chap, misfeasance, allow certain party to pursue a claim against the director) => A claim for misfeasance can be brought by the creditor. Not new, introduce in 1986. Marex is no more than a clarification, not really a development/extension The ability of the creditor or any further party to pursue a claim isn’t limited by the application of the proper claimant rule. Claim can be pursued by common fact. Marex isn’t an exception to the proper claim rule, it simply recognising that a 3rd party may have ground to pursue a claim. It would still not be possible for a SH 2. Exception to the proper claimant rule – essay question Edward V Halliwell – states the exceptions Explain that 3 of them aren’t really exceptions and that only the 4th exception is one. For pbm questions just state the case, but essay question, more a discussion on the case law. The 3 first exceptions are a matter of fact 4rd exception – defines fraud – Daniels V Daniels, and state Burland V Earle. Show evidence that the wrongdoers had a personal gain....