Bamford & Ors v Harvey & Anor

Factual and Procedural Background

This opinion concerns an application for permission to bring derivative proceedings under Part 11 of the Companies Act 2006 by the Plaintiff, who is a 50% shareholder and director of Company A. The Defendant, also a 50% shareholder and director, opposes the derivative claim. The Company has been joined as a second defendant in the proceedings.

The Company was incorporated to purchase and redevelop a site ("the Site") from a third party and subsequently entered into contracts to buy and sell parts of the Site. The Plaintiff personally guaranteed certain payment obligations of the Company. A dispute arose over a £3.5 million payment related to VAT, which the Defendant allegedly represented had been deferred by the third party but was not. The Defendant requested a short-term loan of £3.5 million from the Company, which was advanced but not repaid as agreed. The Plaintiff contended that the Defendant would block any Company action to recover the loan, prompting the derivative claim.

Procedurally, the court had previously allowed the claim to proceed to the second stage of the permission application after a prima facie case was found. The current hearing addresses whether permission to continue the derivative claim should be granted, considering statutory criteria and the parties' arguments.

Legal Issues Presented

1. Whether permission should be granted for the Plaintiff to continue derivative proceedings on behalf of Company A under Part 11 of the Companies Act 2006.
2. Whether the availability of a mechanism under the Shareholders Agreement for the Company itself to bring proceedings against the Defendant precludes the need for derivative proceedings.
3. The applicability of the statutory grounds for refusal of permission under section 263(2) and the discretionary factors under section 263(3) in this context.
4. The relevance of "wrongdoer control" and whether it is a preclusive condition for granting permission for derivative claims.

Arguments of the Parties

Appellant's Arguments (Plaintiff)

• The Defendant would prevent the Company itself from bringing proceedings to recover the loan, justifying the derivative claim.
• The derivative claim is necessary because of deadlock at the board level and the Defendant's control preventing ordinary proceedings.
• The Plaintiff seeks a costs indemnity order to be indemnified by the Company for costs incurred in the derivative claim.

Respondent's Arguments (Defendant)

• The derivative claim is inappropriate as a matter of principle because the Shareholders Agreement provides a mechanism for the Company to bring ordinary proceedings against the Defendant.
• The Defendant contends he would have a good defence to such ordinary proceedings, though this defence was not explained.
• Permission to bring derivative proceedings should be refused and the claim reconstituted as an ordinary action by the Company.
• The Plaintiff should bear all costs incurred to date due to the mistaken commencement of a derivative action.
• The quorum requirements under the Company's Articles of Association mean that without the Defendant's participation, the board cannot validly authorize proceedings, thus the derivative claim is unnecessary.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully analysed the statutory framework under sections 260-269 of the Companies Act 2006, focusing on the criteria for granting or refusing permission for derivative claims set out in section 263. It noted that none of the mandatory refusal grounds under section 263(2) applied.

The court considered the Defendant's argument that the Shareholders Agreement, specifically clause 11, gave the Plaintiff full authority to litigate on behalf of the Company to recover the loan, effectively enabling ordinary proceedings. The court found that the Plaintiff could have arranged for the Company to bring the claim, including borrowing funds or negotiating conditional fee agreements if necessary.

The court rejected the Defendant's argument about quorum requirements preventing effective board meetings without the Defendant's participation, reasoning that this did not preclude the Plaintiff's authority to litigate or arrange funding.

Referencing the principles established in Cinematic Finance and Stimpson, the court emphasised the foundational principle that claims belonging to a company should normally be pursued by the company itself, and derivative claims by shareholders should be exceptional.

The court acknowledged the persuasive authority of Wishart, which rejected the necessity of wrongdoer control as a precondition, but held that the availability of ordinary proceedings by the Company remains a relevant and important consideration.

Finding that the Plaintiff had overlooked the availability of the Shareholders Agreement mechanism and that the Defendant had not objected to proceedings being brought in the Company's name, the court concluded that the derivative claim was not appropriate.

Accordingly, the court decided to refuse permission for the derivative claim and to order that the claim be reconstituted as an ordinary action in the name of the Company.

Holding and Implications

The court's final decision is to REFUSE PERMISSION for the Plaintiff to continue the claim as a derivative action.

The claim must be reconstituted as an ordinary claim brought by the Company itself against the Defendant. The court found no exceptional circumstances justifying a derivative claim where the Plaintiff, as a 50% shareholder, could have procured the Company to bring proceedings directly.

The direct effect is that the Plaintiff must proceed by ordinary action in the Company's name, and the derivative claim cannot continue. No new legal precedent was established beyond the application and reaffirmation of established principles regarding derivative claims and shareholder remedies.