Introduction

The case of Durnont Enterprises Ltd v Fazita Investment Ltd & Ors ([2024] EWCA Civ 299) is a seminal judgment delivered by the England and Wales Court of Appeal (Civil Division) on March 26, 2024. This case delves into the intricacies of derivative claims within the context of an overseas joint venture, specifically focusing on the application of English civil procedure rules to a Cypriot-incorporated company. The central issue revolved around whether the appellant, Durnont Enterprises Limited ("Durnont"), was entitled to pursue derivative claims on behalf of Polish Real Estate Investment Limited ("PREI") against several defendants, including BNP Paribas Bank Polska SA ("the Bank") and individual directors associated with Fazita Investment Limited.

The judgment is particularly noteworthy for its exploration of the procedural requirements for derivative claims under CPR 19.17, the interpretation of fiduciary duties under Cypriot law, and the application of Article 415 of the Polish Civil Code in a cross-jurisdictional setting.

Summary of the Judgment

The Court of Appeal upheld the decision of Tom Smith KC, the Deputy High Court Judge, who had previously granted Durnont permission to continue derivative claims against certain defendants while declining to sanction claims against others, including the Bank, Mr. Jan Czeremcha, and Mr. Maciej de Makay. The core reasoning was the absence of a prima facie case against these defendants, based on the evidence presented and the application of relevant legal principles.

The appellant's claims hinged on alleged breaches of the Share and Subscription Agreement (SSA), fiduciary duties under Cypriot law, and violations of Article 415 of the Polish Civil Code. However, the court found that the appellant failed to demonstrate a sufficient prima facie case, primarily due to the lack of concrete evidence linking the Bank and the individual defendants to any wrongdoing that directly caused loss to PREI.

Analysis

Precedents Cited

The judgment extensively referenced several key precedents to delineate the boundaries of derivative claims and fiduciary duties:

• Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2) [1982] Ch 204: This case established the necessity for a prima facie case when pursuing derivative claims.
• Edwards v Halliwell [1950] 2 All ER 1064: Discussed exceptions to the rule in Foss v. Harbottle, particularly in cases of fraud.
• Abouraya v Sigmund [2014] EWHC 277 (Ch): Clarified the standards for a prima facie case in derivative actions.
• Re Sedgefield Steeplechase Co (1927) Ltd [2001] BCC 889: Addressed the interpretation of share transfer provisions in company articles.
• Re Coroin Ltd, McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 2343 (Ch), [2013] EWCA Civ 781, [2013] 2 BCLC 583 ("Coroin"): Highlighted the impact of unfulfilled conditions precedent on share transfers and proprietary interests.

Legal Reasoning

The court's reasoning encompassed several legal dimensions:

• Application of CPR 19.17: Since PREI is a Cypriot company, CPR 19.17 was applied, treating it as if it were incorporated in the UK. This necessitates the establishment of a prima facie case for derivative claims.
• Prima Facie Case Requirement: Drawing from Prudential Assurance Co Ltd v Newman Industries Ltd, the court emphasized that the appellant must demonstrate that PREI is entitled to the relief sought and that the action falls within the exception to the rule in Foss v. Harbottle.
• Evaluation of Evidence: The court scrutinized the evidence presented, particularly focusing on whether the defendants had knowledge of or were involved in the alleged misconduct. The absence of clear evidence linking the Bank and individual defendants to actions causing loss to PREI was pivotal.
• Interpretation of Article 415 PCC: The court assessed the applicability of Article 415, which mandates that anyone causing damage through fault must remedy it. However, the court found that Durnont failed to establish the necessary elements, such as unlawfulness and direct causation of loss, against the Bank and other defendants.
• Fiduciary Duties under Cypriot Law: Although fiduciary duties were invoked, the court noted the lack of specificity in the allegations regarding breaches of duty, making it difficult to establish a prima facie case.

Impact

This judgment has far-reaching implications for derivative claims involving overseas companies within English jurisdiction:

• Stricter Standards for Prima Facie Cases: The court reinforced the necessity for a robust prima facie case, limiting the scope for derivative claims unless substantial evidence is presented.
• Clarification on Derivative Claims for Overseas Entities: By applying CPR 19.17, the judgment provides a framework for handling derivative claims from non-UK incorporated companies, emphasizing the need for adherence to procedural requirements.
• Interpretation of Fiduciary Duties: The judgment underscores the importance of specificity in allegations related to fiduciary duties, as vague claims are insufficient to meet the prima facie threshold.
• Limitations on Extending Liability: The decision limits the ability to hold third parties, like banks, liable in derivative actions without clear evidence of their involvement in wrongdoing.

Complex Concepts Simplified

Derivative Claims

A derivative claim allows a shareholder to sue on behalf of the company for wrongs done to the company when the company's management fails to take action. In this case, Durnont sought to bring such claims on behalf of PREI against certain directors and the Bank.

CPR 19.17

Civil Procedure Rules (CPR) 19.17 governs derivative claims in the UK, specifically outlining the procedure for shareholders of companies incorporated outside the UK to seek remedies on behalf of their company.

Article 415 of the Polish Civil Code (PCC)

Article 415 imposes liability on anyone who, through fault, causes damage to another, mandating them to remedy the harm. Durnont alleged that the Bank and other defendants violated this article by causing financial harm to PREI.

Prima Facie Case

A prima facie case is the establishment of a legally required rebuttable presumption. In the context of this judgment, Durnont was required to present enough evidence to show that PREI is entitled to the relief sought, which the court found lacking.

Fiduciary Duties under Cypriot Law

Fiduciary duties are obligations imposed on individuals in certain positions of trust, such as directors, to act in the best interests of the company. The allegations against Mr. Czeremcha and Mr. de Makay regarding breach of these duties lacked specificity, contributing to the dismissal of the claims.

Conclusion

The Court of Appeal's decision in Durnont Enterprises Ltd v Fazita Investment Ltd & Ors serves as a critical reference point for future derivative claims involving overseas corporations within the UK jurisdiction. By emphasizing the stringent requirements for establishing a prima facie case and the necessity for precise allegations in fiduciary duty claims, the judgment sets a high bar for shareholders seeking to hold directors and affiliated entities accountable.

Moreover, the judgment elucidates the application of English civil procedure to foreign-incorporated companies, providing clarity on how cross-jurisdictional issues are to be navigated within derivative actions. The reaffirmation that derivative claims require substantial evidence to proceed without discretion underscores the judiciary's role in ensuring that only well-founded claims advance to judicial deliberation.

Ultimately, this case reinforces the importance of meticulous preparation and clear, evidence-backed allegations in derivative suits, particularly when they intersect with international corporate structures and diverse legal frameworks.