Practice and procedure – Derivative claim – Section 263 of Companies Act 2006 – Common law test – Claimant seeking to bring derivative claim against first defendant in respect of losses suffered by second defendant limited liability partnership (LLP) – Judge granting permission to continue claim – First defendant appealing – Whether test for continuing derivative action against LLP was section 263 or common law test – Appeal allowed
The claimant and the first defendant were 50% partners in the second defendant, which was the freehold owner of a property situated at 51 Bromham Road, Bedford. The property was originally financed with a loan, secured by a charge over the property. It was a term of the loan that if it was not repaid in full within 14 days of expiry, the second defendant would incur a charge amounting to 2% of the outstanding indebtedness.
The claimant negotiated alternative financing of £7.5m at an annual interest rate of 3.15%. The claimant alleged that the first defendant, in breach of duties of honesty and good faith owed to the claimant and in breach of a duty to act in the best interests of the second defendant, declined to execute the refinancing documentation straight away. By reason of the delay, the amount required to redeem the second defendant’s loan had increased by £206,933.21, which included the 2% charge as a result of late repayment. The amount by which the second defendant’s loan from the claimant could be repaid was reduced by the same amount.
The claimant claimed damages flowing from the first defendant’s breaches of duty. The claimant was granted permission under section 261(f) of the Companies Act 2006 to continue a derivative action against the first defendant on behalf of the second defendant, a limited liability partnership (LLP). The first defendant appealed.
Held: The appeal was allowed.
(1) Sections 260 to 264 of the 2006 Act applied to derivative actions in respect of companies. Section 15 of the Limited Liability Partnerships Act 2000 permitted regulations to be made specifying aspects of legislation concerning companies that would apply to LLPs. It was common ground that the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 specified that sections 260 to 264 of the 2006 Act did not apply to LLPs.
The claimant had submitted that section 263 was to be applied to an LLP by virtue of CPR19.9C. However, CPR19.9C applied only the procedure under sections 261, 262 and 264, not that under section 263. That omission seemed to be deliberate. The provisions of CPR 19.9 to 19.9F contained purely procedural matters and the sections of the 2006 Act that were applied to LLPs by CPR19.9C were themselves concerned purely with procedural matters. Section 263, on the other hand, made a substantive change to the test to be applied in considering an application for permission. Its application to LLPs would itself be a substantive change, and one that was not apt to be brought about by provisions of the CPR concerning matters of pure procedure. It would be surprising if CPR19.9C was intended to apply the new statutory test under section 263 to LLPs without it being the exclusive test. Furthermore, the form annexed to the practice direction at CPR 19C.9 for an application by a company contained a statement that the factors the court had to take into account were those set out in section 263. However, that statement was missing from the form for an application by a body corporate that was not a company.
(2) It was appropriate to grant permission for the first defendant to take the new point on appeal that the applicable test was that at common law, not under section 263 of the 2006 Act. The common law test depended upon an analysis of what was in the pleaded case. The new point did not give rise to any new issue of fact upon which the court would have required any further evidence. This case was at the furthest end of the spectrum to cases involving a full trial and determination of disputed questions of fact. The claimant had had ample time to meet the point and had suffered no other form of irremediable prejudice, by the point being taken late, that could not be compensated for by an appropriate costs award. On the other hand, the first defendant would be prejudiced by being unable to take the point, because it would be facing a derivative claim which as a matter of law ought not to be brought. While taking into account the desirability of finality, weighing all the factors in the balance, the balance came down in favour of allowing the first defendant to take the new point on appeal.
(3) To bring a derivative claim at common law, it was necessary to show that the case came within one of the four established exceptions to the rule in Foss v Harbottle, of which only the fourth was relevant, ie that there was fraud and there was no other remedy. In the absence of fraud or an ultra vires act, the wrongdoers themselves had to have benefitted from the wrongdoing. Applying that test on the facts of this case, the questions were: whether the actions of the first defendant had caused financial loss to the members; whether fraud in the sense of deliberate and dishonest breach of duty was pleaded; and whether it was alleged that the first defendant acquired a personal benefit at the expense of the second defendant: Abouraya v Sigmund [2014] EWHC 277 (Ch) followed.
On the evidence, the first defendant’s actions had caused financial loss to the members. The pleading sufficiently included an allegation that (so far as the derivative claim was concerned) the relevant loss was the increased amount that the second defendant was required to repay to the finance company and that was a loss which would also be suffered, reflectively, by the members. However, there was no allegation of dishonest breach of duty and no personal benefit to the first defendant at the expense of the second defendant. The claimant’s pleading fell short of an allegation of the type of benefit which was required: Daniels v Daniels [1978] Ch 406, Abouraya and Harris v Microfusion 2003–2 LLP [2016] EWCA Civ 1212 followed.
Roger Laville (instructed by Nick Sellman (Holdings) Ltd) appeared for the first defendant; Niraj Modha (instructed by Acuity Law) appeared for the claimant.
Eileen O’Grady, barrister
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