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Is the Companies Act 2006 the sole route to a derivative claim?

Universal Project Management Services Limited v Fort Gilkicker Limited & Others [2013] EWHC 348.

All the shares in Fort Gilkicker Limited {“FGL”} were owned by AHP, a limited liability partnership. FGL’s directors were Dr Frischmann and Mr Pearce. AHP was jointly owned by Mr Pearce and Universal Project Management Services Limited {“UPMS”}, a company controlled by Dr Frischmann.

FGL had been incorporated to develop a site over which it held an option. Before the option was exercised by FGL, Mr Pearce and Dr Frischmann fell out. The option expired and Mr Pearce formed another company {“FGP”} which acquired the land on the same terms as FGL’s option.

In the absence of a derivative claim, the position was deadlocked. Neither UPMS nor Dr Frischmann could compel AHP or FGL to bring a claim against FGP since Mr Pearce owned 50% of AHP.

UPMS therefore brought a derivative claim against both FGP and Mr Pearce.

Sections 260(1) and (2) provide:

(1) This Chapter applies to 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.
This is referred to in this Chapter as a “derivative claim”.
(2) A derivative claim may only be brought—
(a) under this Chapter, or
(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice)

On the application for permission to bring the derivative claim, Briggs J had to consider whether these provisions limit the availability of a derivative claim to members alone or whether a double derivative claim, as in Prudential Assurance Co. Ltd v Newman Industries & Ors (No. 2) [1982] Ch 204, still remains available.

The Judge concluded that Section 260 provides a statutory code in respect of derivative claims which may be brought by members. It does not, however, affect claims which might formerly have been brought by non-members.

The question whether the common law permitted extended forms of derivative claim, i.e. “double” or “multiple” claims, had been considered in Waddington Ltd v Chan Chun Hoo Thomas [2008] HKCU 1381. Briggs J said that the question had been answered affirmatively for reasons which appeared as applicable to English as to Hong Kong common law.

At paragraph 44 of his judgment Briggs J said:
“I have come on balance to the conclusion that the 2006 Act did not do away with the multiple derivative action. My reasons follow. First, there was before 2006 a common law procedural device called the derivative action by which the court could permit a person or persons with the closest sufficient interest to litigate on behalf of a company by seeking for the company relief in respect of a cause of action vested in it. Those persons would usually be a minority of the company’s members, but might, if the company was wholly owned by another company, be a minority of the holding company’s members. These were not separate derivative actions, but simply examples of the efficient application of the procedural device, designed to avoid injustice, to different factual circumstances.”

Parliament had not expressly abolished the whole of the common law derivative action in relation to companies. By implication from the statutory code it had done so in relation to derivative claims by members but it did not go further than that, whether expressly or by necessary implication.

Mr Pearce relied on an alternative argument that, whatever the scope of the common law derivative action, it did not extend so as to allow members of an LLP to bring proceedings on behalf of a company wholly owned by that LLP. Briggs J rejected this argument as follows:
“….once it is recognised that the extension of locus standi beyond the immediate members of the wronged company is based upon the need to find a suitably interested claimant to pursue the company’s claim when it is disabled from doing so, the precise nature of the corporate body which owns the wronged company’s shares is of no legal relevance, provided that it is itself in wrongdoer control and has some members at least who are interested in seeing the wrong done to the company put right.”

The Judge also concluded that it was irrelevant that an LLP’s members can have no recourse to a statutory derivative claim.