Jones v Jones & Ors [2002] EWCA Civ 961

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF

JUSTICE, CHANCERY DIVISION

(Mr Justice Pumfrey)

[2002] EWCA Civ 961

Case No Case No: A3/2001/2445 CHANF

Venue Royal Courts of Justice, Strand,, London, WC2A 2LL

Between

JonesAppellant

Jones & OrsRespondents

Before

Lord Justice Rix

Lady Justice Arden

Mr Justice Douglas Brown

Mr Robin Hollington QC and Mr Stephen Schaw Miller (instructed by Herbert Smith) for the Appellant

Mr Leslie Kosmin QC and Mr Edward Davies (instructed by Halliwell Landau) for the 1st and 2nd Respondents

The 3rd Respondent was not represented and did not appear

Date 12 July 2002

Lady Justice Arden :

When

[1]the Law Commission of England and Wales conducted an empirical survey of petitions presented by members of companies in 1994 and 1995 to the Companies Court in London pursuant to section 459 of the Companies Act 1985 for relief from unfair prejudice, it found that the vast majority (over 96%) concerned private companies ( Shareholder Remedies, Consultation Paper No. 142 (1996) pages 235 to 238). In some 22.4% of the cases surveyed, the petitioner was a 50% shareholder. In some 67% of those cases, exclusion from management was alleged. At the time of the survey, only 42.3% of the cases surveyed were active, some 23.7% having already been settled. This indicates that a substantial number of cases brought under section 459 in 1994 and 1995 at least never came to trial, and there are no doubt strong economic incentives to settling shareholders' disputes without a trial. I am not aware of any reason why there should have been any material change in these empirical findings since 1994 and 1995.

[2]The proceedings in the instant appeal are brought under section 459 and also concern a private company. The petitioner is a 50% shareholder and among other allegations he relies on his exclusion from management. Where it is alleged that exclusion from management was wrongful, the respondents to the proceedings not infrequently respond by alleging misconduct justifying the exclusion. Here too the first and second respondents (whom I shall call "the respondents") rely on the petitioner's misconduct. Indeed, the allegations of misconduct on which they rely are also the subject of separate proceedings brought by the company seeking an account of profits and other relief arising out of the various breaches of fiduciary duty said to have been committed by the petitioner. Section 459 proceedings and actions of this nature for breach of fiduciary duty are notoriously costly. The novel point apparently presented by this appeal is the question whether the costs of the separate proceedings for breach of duty can properly be paid by the company or whether they should be borne personally by the respondents to the section 459 proceedings. As a practical matter the respondents now have control of the board of directors of the company. However, the appellant denies that they are entitled to control it.

[3]Before examining the facts of this case, I will explain some of the terms used below. In the present case the separate proceedings for breach of duty ("the Chancery action") are brought by the company and in its name. Such an action is distinguishable from a "derivative action". One of the arguments in this case is that the Chancery action should be reconstituted as a derivative action. By "derivative action" I mean an action commenced by one member of a company on behalf of all other members (other than any member alleged to be a wrongdoer) to enforce a cause of action belonging to the company. The company is joined to the proceedings as a nominal defendant so that relief can be ordered in its favour. There are under the general law only limited circumstances in which such an action can be brought. These circumstances are often referred to as the exceptions to the Rule in Foss v Harbottle (1843) 2 Hare 461 : as to these , see, for example, Buckley on the Companies Acts, 15 ed (2000), paragraph 127.9. These circumstances have been extended by section 461 of the Companies Act 1985 which provides that relief from unfair prejudice can take the form of an order authorising proceedings to be taken in the name of the company by persons approved by the court (section 461(2)(d)). In a derivative action the claimant requires the permission of the court to continue the claim (CPR 19.9; Buckley , paragraph 127.11). In an appropriate case, the court can make an order that the company should indemnify the claimant against any liability in respect of costs incurred in bringing the claim (CPR 19.9(7)). The court can make such an order at an interim stage. I refer below to an order under CPR 19.9(7) as "a pre-emptive order as to costs".

[4]CPR 19.9(7) reflects the decision of this court in Wallersteiner v Moir (No.2)

[1975] 1 QB 373

, at 391-2 per Lord Denning MR and at 403 per Buckley LJ. Lord Denning held that:

"... the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonably incurred by him in the course of the agency ... It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris."

As under the practice relating to trustees and beneficiaries, an order granting permission to bring a derivative action or granting a costs indemnity may be made down to disclosure or the exchange of witness statements so the court can consider whether to make a further order at that stage.

[5]Under section 459 of the Companies Act 1985, proceedings are brought by a member personally, and not as agent for the company. The petitioner must show unfairness (see generally Buckley , paragraph 459.23). The starting point for determining the rights of the parties is the company's memorandum and articles, but they may have been qualified by an understanding, the breach of which can give rise to unfair prejudice for the purposes of section 459 (see O'Neill v Phillips

[1999] 1 WLR 1092

). It is easier to infer such an understanding in the case of a "quasi-partnership" company, that is a company which characteristically has a limited number of members, imposes restrictions on the transfer of shares in its articles and where many of its members participate in management. In the present case, it is common ground that the company is a quasi-partnership company. A quasi-partnership company is referred to below as a "deadlock" company if two members have equal shareholdings and are directors and there is no person who can cast a casting vote at board or company meetings. In this case , it is in issue whether Incasep is a deadlock company. However, the petitioner contends that it is a deadlock company. He has not suggested on this appeal that as he is referred to in the accounts as chairman and the articles provide for the chairman of a board or company meeting to have a second or casting vote, it would be within his power under Incasep's constitution to resolve any deadlock. Background

[6]This is an appeal by Thomas Edward Jones ("Edward") against the order of Pumfrey J dated 26 October 2001 in so far as the judge thereby dismissed Edward's application for orders restraining the application of funds belonging to Incasep Ltd ("Incasep") from being applied in payment of the costs incurred in the proceedings brought against Edward in claim number HC01C04555 (being the Chancery action referred to above) and in payment of the fees of Harrison Peak ("HP") in connection with bringing and pursuing those proceedings and restraining the holding of a board meeting ratifying the inception of and pursuit of those proceedings in the name of Incasep.

[7]The issued share capital of Incasep is held as to 50% by Edward and as to 50% by his brother, William Frank Jones ("William"), the first respondent to this appeal. The judge's order was made on an interim application in proceedings brought by Edward seeking relief from unfair prejudice pursuant to section 459 of the Companies Act 1985. The Chancery action are proceedings brought in the name of Incasep, seeking damages and an inquiry in respect of alleged breaches of duty by Edward to Incasep. We are told that the amounts claimed total £1.4 m. with interest.

[8]Incasep was established in 1982. Its business is in plant hire and it trades mainly under the name "Greyhound Plant Services". Until 10 October 2001 William and Edward were, according to Edward, the only directors who were involved in any way in the management of its affairs. William was technical director and Edward was managing director. William's wife, Susan, is also a director of Incasep, but until October 2001, on Edward's case, she took no significant part in the management by the board of its affairs. Susan is the second respondent to this appeal. It is part of Edward's case, disputed by William, that William and he agreed in about 1989 that she would resign, which she has not done, and that it was not part of the understandings between William and himself that, if they disagreed on some matter with respect to the management of Incasep, Susan would be able to exercise a casting vote to break the deadlock. In this sense Edward contends that Incasep is a deadlock company. As I have said, it is common ground that it is a quasi-partnership company.

[9]In late 2000 and early 2001 (the precise date is in dispute) the relationship between Edward and William broke down. There were disagreements about business strategies. Edward wanted to expand the enterprise by taking on more plant and equipment with a consequent increase in debt and risk. William did not wish to do this. In February and in May 2001, Edward announced that they should part company. In the section 459 proceedings Edward relies on a letter dated 14 February 2001 written to a partner in Incasep's auditors, which found its way to William. In this letter, Edward said that the current situation was unworkable and the matter had to be resolved quickly. The letter contains the memorable line:

"You cannot put a ship to sea without a captain"

. Edward contends that this letter demonstrates that by this date the management of Incasep was in fact deadlocked.

[10]Edward then went ahead on his own account and set up companies with names similar to Greyhound Plant Services. These companies took on plant and equipment on long-term hire purchase for short-term hire to Incasep. These companies traded, it is said, openly from the premises of Incasep. It is Edward's case, disputed by William, that he set up these companies on his own account at the suggestion of the auditors of Incasep, PricewaterhouseCoopers, and that he told William what he was proposing to do, to which William responded "Do what you like".

[11]In July 2001, William began to have suspicions about Edward's activities and instructed Harrison Peak ("HP"), accountants who had formerly advised Incasep, to investigate. Edward had no knowledge of these investigations and was not asked any questions about his actions.

[12]On Friday, 5 October 2001, William formally convened a board meeting on 10 October 2001 to consider the future of the company. At the board meeting on 10 October 2001, attended by Edward, William, and Susan and apparently chaired by Mr Harrison of HP, Edward was orally told of allegations of gross misconduct on his part (prepared by HP). Edward was not given time to submit any detailed reply but was instead invited to resign or be dismissed. Edward did not resign, and was summarily dismissed from his office as managing director and barred from the premises of Incasep. He was accordingly excluded from participation in the management of Incasep in his executive capacity.

[13]By letter dated 12 October 2001, Edward's solicitors gave notice to William's solicitors that they had no authority to act for Incasep and that Incasep's funds should not be used in the forthcoming litigation.

[14]Edward did not accept the validity of the actions of William and Susan and on 11 and 12 October 2001 entered the premises of Incasep to carry on his duties as managing director. On Monday, 15 October 2001, Incasep applied without notice before Evans- Lombe J for an injunction to bar Edward from the premises and to stop him from acting as managing director. Evans-Lombe J granted an injunction stopping Edward from acting as managing director subject to William giving a personal cross-undertaking in damages and undertaking not to use the funds of Incasep for the purpose of bringing the proceedings.

[15]On Tuesday, 16 October 2001, the Chancery action was commenced in the name of Incasep against Edward alleging breach of duty. This was done, it appears, on William's initiative, but without the authority of a resolution of the board of Incasep. On Thursday, 18 October 2001, William convened a board meeting for the purpose of ratifying the commencement of the Chancery action.

[16]On Friday, 19 October 2001, Edward commenced his section 459 proceedings. He alleges that Incasep was "a business venture of the two of them based upon the relationship of trust and confidence between them [and] upon an agreement or understanding between them that [Edward] would manage the day to day affairs of the company as its managing director and each would be employed in the Company and thereby earn his living." He also alleges that since about 1989 the agreement or understanding between them was that they should be equal shareholders and the only directors of Incasep. He seeks relief by way of an order for the purchase of William's shares, alternatively an order that William buys his shares in either case at a value determined by the court. In the further alternative, he seeks an order for the winding up of Incasep on the "just and equitable" ground.

[17]By an application dated 19 October 2001 in the section 459 proceedings, Edward applied for orders including an order prohibiting the holding of the board meeting convened to ratify the commencement of the Chancery action and to prohibit any payment by Incasep for any costs incurred in connection with the bringing of proceedings whether to William's solicitors or to HP.

[18]Incasep's application and Edward's application came before Pumfrey J on 24 October 2001 and he gave judgment on 26 October 2001. The judgment below

[19]At the outset of his judgment the judge noted that the dispute arose out of a falling out between the two brothers.

[20]The judge then dealt with the application that Edward should be reinstated as managing director of Incasep, which he dismissed That matter is not in issue in this appeal. Accordingly, I need not summarise his reasons on that issue.

[21]The judge held that Susan had never resigned as a director and that accordingly she could vote at board meetings. In so holding, the judge did not address Edward's case, as explained to this court, namely that Susan should not exercise any casting vote as between the brothers. The judge noted that it was not in dispute that Susan had not taken any active role in the day to day management of Incasep for many years.

[22]As respects Edward's application to restrain the board meeting to ratify the commencement of the Chancery action and the use of Incasep's funds for paying the costs of that action, the judge referred to the decision of Sir Richard Scott VC in Halle v Trax B W Ltd

[2000] BCC 1020

. In that case the company was effectively a quasi-partnership between two equal partners. They were unable to agree on the manner in which the company's business should be conducted, and one wanted to bring proceedings on behalf of the company against the other. Sir Richard Scott VC refused to make an order that the claimant, Mr Halle, should be indemnified in advance by the company for the costs of this action. Sir Richard Scott VC held that, although it would be unfair to Mr Halle if he succeeded in the action and had to bear some part of the costs himself, it was unlikely that he would be in that position because he would have an order for costs against the unsuccessful individual defendant and a lien over the damages produced by the action for his unpaid costs. On the other hand, if the action failed, it would be unfair to the defendant that his investment in the company should have to bear one half of the costs of the unsuccessful action.

[23]The judge examined the nature of the company in Halle v Trax and the nature of the alleged breach of duty. He noted that, according to the report, the company was a comparatively small company carrying on the business of supplying various types of adhesive wheel weights to the automobile industry. The nature of the breach of duty relied on was the misappropriation of corporate opportunities. He concluded that the nature of the business, the size of the business and the importance of the alleged breach of fiduciary duty did not appear clearly from the report.

[24]The judge went on to hold that the question whether to exercise the discretion to grant the relief sought by Edward depended on an assessment of all the circumstances surrounding the dispute. He held that it was a fundamental aspect of the circumstances that Incasep was a family company and that the brothers each had 50%. At the same time, however, it was a very substantial company in a large way of business and the nature of the dispute was a serious one. He also held that substantial and important parts of the claim were not adequately answered. He held that the nature of the dispute and the strength of the claim were highly material circumstances which have to be taken into account when deciding whether to grant the relief sought.

[25]The judge held that the next question was whether the allegations of breach of duty were just a convenient stick with which William should be able to beat Edward. The judge rejected that contention because the allegations of breach of duty were substantial and apparently well-founded on the evidence available. He continued that the fairness to both Edward and William had to be equally considered. Sir Richard Scott VC was greatly influenced in Halle v Trax by the unfairness to the respondent in the circumstances that he had won. That was always true of a dispute involving a company of one of its members. However, he held that it was not clear to him that in those circumstances the net loss to the successful party is as clear as Sir Richard Scott VC suggested. But in any event, where the company was a substantial trading company, in the judge's judgment, it was not necessarily possible to relate the costs paid to the successful member in an action by the company directly to a diminution in the value of that member's shareholding in the company. Accordingly, it was merely one factor to be taken account when deciding in all the circumstances the best course to take.

[26]The judge was strongly influenced by the nature of the particular claim in the present case and its apparent strengths on the papers as they then appeared to him. Accordingly, in his judgment, the action was one which could and should properly be brought by Incasep at its own expense. In the circumstances, he refused to grant the orders sought by Edward. However, he made orders in the Chancery action restraining Edward from holding himself out as director and taking part in day to day management of Incasep. He accepted a cross-undertaking in damages given by Incasep but refused to make any order continuing the undertaking in damages which William had been required to give to Evans-Lombe J when similar interim relief had been sought on 15 October 2001. Events since judgment

[27]On 31 October 2001, William and Susan passed a resolution, as directors of Incasep, ratifying the Chancery action. Moreover lengthy pleadings have now been filed in the section 459 proceedings and in the Chancery action, including a detailed defence by Edward in the Chancery action. In his defence Edward admits that he is liable to account to Incasep for claims totalling about £95,000 out of the £1.4m. claimed.

[28]Further evidence has been filed on this appeal and in my judgment it should be admitted as neither party has any great objection to it. It shows among other matters that Incasep is in a strong financial position. As at 31 March 2001, Incasep had a credit balance on profit and loss account reserve of £1.8m. The further evidence also includes a copy of a detailed offer made by William to buy Edward's shares in Incasep at their fair value as determined by an independent expert. The offer provides for the brothers to go their separate ways in that on completion Edward is to resign his directorship and release any claims against Incasep. Nothing, however, is said in this offer about the Chancery action, but since the offer contemplates that Edward and William will go their separate ways the likelihood is that William intends that on completion Incasep should release its claims against Edward, using the statutory "whitewash" procedure in section 155 of the Companies Act 1985 to overcome the difficulty that this would involve financial assistance by Incasep contrary to section 151 of that Act. The financial information to which I have referred indicates that this course is almost certainly open to the parties.

[29]William is willing to provide an undertaking to repay to Incasep both Incasep's costs of the Chancery action and those payable to the appellant and the other defendants if the court so orders at the trial of the section 459 proceedings and the Chancery action. It is accepted that both sets of proceedings should be tried at the same time.

[30]In the Chancery action Incasep has separate junior counsel from junior counsel instructed by the respondents to the section 459 proceedings. However, where work is carried out for Incasep which is also relevant to the respondents' defence to the section 459 proceedings, Incasep passes the appropriate information to the respondents, and vice-versa. basis. The costs of such work are apportioned between Incasep and the respondents by the solicitors for those parties (who are the same firm) in such manner as they consider appropriate. William is willing to provide an undertaking that such apportionment will in future be on a 50:50 basis. Appellant's submissions

[31]Mr Robin Hollington QC, for the appellant, submits that it is seriously arguable that there was an agreement or understanding between the brothers that they should be equal shareholders and the directors of the company and that any resolution passed by the company on the strength of Susan's vote is a breach of that agreement or understanding and, therefore, unfairly prejudicial under section 459 of the Companies Act 1985. On this basis, Incasep should be regarded as a deadlock company. Accordingly, he submits that it is a further act of unfair prejudice for any resolution to be passed ratifying the action brought in the name of the company on the strength of Susan's vote. Damages is not an adequate remedy, and Edward cannot be compensated in money terms for the unfair advantage obtained by William using the resources of Incasep in this litigation. I will refer to this submission by Mr Hollington as his "narrower submission".

[32]Expanding on his narrower submission, Mr Hollington accepts that Edward cannot stifle a separate action against him, assuming that it would be appropriate for a separate action to be prosecuted rather than allegations of misconduct being determined in the context of the section 459 petition. However, he contends that the appropriate course is for William to commence a derivative action against Edward or for William to be substituted as claimant in the Chancery action. William could then apply to the court for an indemnity in respect of future costs from the company although such an application will have to overcome the hurdle of Halle v Trax , above. As a result of the judge's order, Incasep has been allowed to fund the action and the court will not review the continuance of the litigation or the use of company funds to pay the costs of the litigation as it would if the Chancery action were a derivative action.

[33]Mr Hollington also makes a wider submission. He points to the fact that the allegations of misconduct will form an integral part of the defence to the petition brought by Edward and submits that the authorities show that it is an almost inflexible rule that the funds of the company should not be expended by the controlling shareholder in a dispute between the shareholders: see per Lindsay J in Re Company No. 001126 of 1992

[1993] BCC 325

, 329 G-H, 333 B-D, applying Pickering v Stephenson (1872) LR 14 Eq 322 and other more recent cases. Here the Chancery action is in essence part of the dispute between the shareholders. It would drive a coach and horses through the general rule if the controlling shareholder were able to procure the company to commence and fund a separate action against the excluded quasi-partner for the misconduct alleged against him. It cannot make any difference that William managed to commence the Chancery action four days before the section 459 proceedings were commenced.

[34]Mr Hollington submits that the judge erred in principle in the exercise of his discretion. The judge approached the matter as if it was solely a question of applying Halle v Trax . That case concerned a derivative action. Moreover, the judge wrongly distinguished Halle v Trax on the basis that Incasep was a substantial trading company and that it was not possible to draw an exact correlation between the costs of the proceedings and the effect on the value of Edward's shareholdings. Halle v Trax concerned a trading company and Sir Richard Scott VC did not suggest that there was or had been an exact correlation between the value of the shareholding and the costs. The judge distinguished Halle v Trax on the further ground that the Chancery action was one that should and could properly be brought by the company at the company's expense, having regard to the nature of the claim against Edward and its apparent strength. Mr Hollington submits that this begs the question whether it is proper for company funds to be expended and overlooks the general rule. The judge also did not consider the alternative form in which the action could be constituted, namely as a derivative action. No matter how strong any part the company's claim against Edward appeared to be at this very early stage and before Edward had had a proper opportunity of meeting the allegations against him, it could not be right that the court should permit the company to fund an action against one quasi-partner when it was clear the claim was inextricably mixed with a wider shareholder dispute in a deadlock company. The Chancery action could be converted into a derivative action simply by substituting William as petitioner. This would involve little cost.

[35]In any event, as a separate matter, the judge should have required a personal undertaking in damages from William as a condition of granting an injunctive relief against Edward. A cross-undertaking from Incasep was a wholly inadequate protection to Edward since he was a 50% shareholder.

[36]The undertaking now offered by William and Susan is inadequate because there is no evidence as to their means and the court has limited jurisdiction to make an order for costs against a non-party under section 51 of the Supreme Court Act 1981. Respondents' submissions

[37]Answering Mr Hollington's narrower submission, Mr Leslie Kosmin QC, for the respondents, submits that there is no evidence to support the allegation in the petition that it was agreed that Susan would resign in 1989. He submits that the section 459 proceedings are a tactical device and that the prospects of success are negligible. There is no basis for preventing the company from relying on the board resolution of 31 October 2001. Mr Kosmin submits it is inevitable that the same matters will be relied upon in the section 459 proceedings as in the Chancery action because the misconduct justifies the exclusion of Edward from Incasep's business, which Edward contends is in breach of the obligation of trust and confidence on the basis of which Incasep was established. Mr Kosmin submits that Edward will be barred from obtaining any relief because of his misconduct.

[38]As to Mr Hollington's wider submission, Mr Kosmin accepts that Incasep cannot pay any costs of the section 459 proceedings. However, he submits that the Chancery action is for the benefit of the company. He adopts the judge's distinction of Halle v Trax . He submits that the ratification resolution passed on 31 October 2001 was valid and proper. He submits that the case against Edward is substantial. For example, Edward admits he received a commission of £300,000 from a supplier of railway sleepers to Incasep. He has repaid those monies, but that does not mean that Incasep may not have some claim against him on the basis that it must have been charged a higher price by the supplier than the supplier would have charged if it had not also paid the commissions. Mr Kosmin submits that Incasep has exceptionally strong claims against Edward. He further submits that Edward wishes to stifle the Chancery action. If he succeeds on the present appeal, the costs of the Chancery action will become a major issue for William and Susan.

[39]Mr Kosmin refutes the criticisms made by Mr Hollington of the judge's judgment. As to the possibility that the Chancery action could be continued by William as a derivative action, Mr Kosmin submits that this would involve the extra costs of an application for permission to continue the action under CPR 19.9. Mr Kosmin submits that the court would make a pre-emptive order as to costs in any event if the action were converted into a derivative action. Conclusions Mr Hollington's narrower submission

[40]In my judgment, Edward's contention that it was a breach of the understandings between Edward and William, and thus wrongful as between them, that Susan should by her vote as a director determine disagreements between them raises a serious issue to be tried. Edward alleges that, when the quasi-partnership started, his secretary and Susan were appointed "nominee" directors. (There is a separate issue whether the directors could properly agree to act as nominees, and Mr Kosmin persuasively argued that they could not, but whether or not they ought to have done so, Edward says that they did). In the 1980s, he (Edward) had to discharge personal financial obligations associated with an earlier plant hire business which had failed. He alleges that he did this by 1989, that William and he were then appointed directors and that they then agreed orally that the "nominee" directors would resign. Edward's secretary did so resign. Edward further alleges that, until October 2001, Susan (though company secretary and for convenience a signatory on its bank accounts ) had never been involved in managerial decisions. Edward contends that there is no reason why he would have wished to make her arbiter on major management matters on which the two active directors disagreed. If she continued as a director in breach of his agreement and considered that she had an obligation to exercise her vote in order to discharge her fidiciary duties, then it is reasonably arguable that William should have co-operated with Edward to remove her as a director.

[41]William and Susan contend that, as Susan's name appears in previous annual accounts of Incasep as a director and, contrary to his original evidence, Edward must have known that she had not resigned in 1989. Edward says that he did not notice that Su s an was named a director in the accounts. These matters weaken Edward's case but not fatally. I do not consider that they entitle the court to conclude that the contentions referred to in the previous paragraph are unsustainable. Edward's case raises issues of fact which it is no part of the function of the court, which is dealing with the matter at an interim stage, to determine.

[42]If Edward were to be successful in his contentions, then the resolution of 31 October 2001 ratifying the commencement of the Chancery action should not have been passed. The only directors to attend the meeting on that day were William and Susan. If Susan's vote could not be counted, then it is at least arguable that she could not be counted in the quorum (see Buckley , Divider P, paragraph T [A89.7]). Mr Kosmin submits that the litmus test ought to be whether an independent board of directors would have ratified the commencement of the Chancery action. That might be a relevant test if an application were made for relief under section 727 of the Companies Act 1985 but here the issue is whether there is valid authority for the action. For this purpose , a notional resolution of a notional independent board cannot be substituted for the requirement of a valid board resolution in accordance with Incasep's constitution (in which term I include, in the case of a quasi-partnership, its constitution as qualified by understandings between the members).

[43]Mr Kosmin submits that Edward would have been bound to vote in favour of the resolution. That submission does not meet the difficulty here. Edward neither voted on that resolution nor attended the relevant meeting. The respondents' case is that the resolution was carried by their votes so it does not assist them, on this point, to argue that, if Edward had been present, he would have been bound in the proper performance of his duties as a director, to vote for the ratification resolution. That did not arise. If Edward had for instance voted against the resolution the court might then have had to consider, in the light of the relevant evidence, whether in so acting Edward had acted in what he in good faith considered to be Incasep's best interests, or not.

[44]Mr Kosmin submits that Edward would not be entitled to any relief in the section 459 proceedings because of his serious breaches of duty. This led to two submissions from Mr Hollington. First, he submits that even if Edward had acted in breach of duty he had been transparent and that diminishes the argument that his misconduct should bar him from any relief. That is clearly an arguable point. Second, Mr Hollington submits that, because the management of Incasep had become deadlocked as a result of genuine management disagreements in February 2001, Edward's right to relief crystallised at that date and his subsequent misconduct was effectively irrelevant: I would reject that latter submission for present purposes as the appropriate relief in that case would be a winding up on the "just and equitable" ground not a purchase order under section 459. I accept Mr Kosmin's submission to this extent, namely, that the conduct of a petitioner under section 459 may be relevant both to the issue of fairness of his exclusion from participation in management and the form of any relief. However, it is seriously arguable that Edward's misconduct should not disentitle him to relief on his complaint that Susan's vote should not have been used to determine disagreements between the two quasi-partners on the basis that his misconduct, however grave, did not entitle William to usurp the powers of the board. William could always have pursued the matter by cross-petition under section 459 ( Lowe v Fahey

[1996] 1 BCLC 262

), or by derivative action.

[45]In accordance with the principles applicable to interim injunctions, I turn to consider the balance of convenience. There is no question of Incasep's creditors being prejudiced by the grant or withholding of the interim injunction, and so their position can be put on one side. For the respondents, it can be said that, if Edward were to win at trial, the costs which Incasep ought not to have paid can be "credited" to Edward and thereby taken into account in ascertaining the fair value of whosever shares are to be purchased. Moreover, Edward's position is reinforced by the undertaking which William offers. On Edward's side, a number of points emerge. First, William's means are not in evidence. They would appear to be quite limited and while he has shares in Incasep, and those shares have considerable value, they are not readily realisable. Second, if an injunction is not granted, the process (described above) of apportioning costs which Incasep (or the respondents) incurs but which are referable to work which is useful to the respondents (or Incasep) will continue. This is unsatisfactory because the apportionment is being effected by the solicitors for the respondents in such manner as they think fit. Of course, if it is found at the end of the apportionment has not been carried out correctly, it can be remedied. But, in the meantime, there is unlikely to be any satisfactory way of monitoring this apportionment. Thirdly, if an injunction is granted, Edward will have to give a cross-undertaking in damages to Incasep, and no doubts have been raised as to his financial position. Accordingly, Incasep will be protected against (say) any loss of interest as a result of not being able to pursue the Chancery action (if not settled) until after the section 459 proceedings have been disposed of. No-one has suggested that findings made in those proceedings (to which Incasep is a party) will not bind the parties in the Chancery action, so that matters have to be relitigated. Fourthly, and importantly, there is a fair possibility that the parties will reach a compromise. Incasep cannot continue with two warring parties like Edward and William. As a practical matter, the Chancery action will have to be settled at the same time. Fifthly, and again importantly, not to grant an injunction would put William and Susan in a strong position to defend the section 459 proceedings. It would save them raising the costs, which Incasep otherwise funds, by means of a commercial loan which it may indeed be difficult for them to raise. Putting aside possible objections under section 151 of the Companies Act 1985 (to which I return briefly below), there is no corporate benefit suggested to flow from helping William and Susan in this way, and there have to be compelling reasons for the court to exercise its discretion in such a way as to confer an advantage (that is, something the party would not otherwise have ) on one side or the other in a shareholders' dispute.

[46]Sixthly, no order restraining the pursuit by Incasep of the Chancery action would prevent Incasep from defending the counterclaims brought against it in the Chancery action by Edward and his companies. Mr Kosmin did not make any application to stay those counterclaims. However, in case Edward and his companies should obtain judgment against Incasep, in my judgment they should be required to undertake to the court not to enforce any such judgment without the leave of the trial court. Moreover, an order against Incasep would neither prevent William (as a member of Incasep) from seeking compensation for Incasep for Edward's breaches of trust by his own petition under section 459, nor prevent the respondents from relying on those breaches of trust in answer to Edward's petition as they now do. Nor would it prevent William from applying to be substituted as claimant in the Chancery action, thus converting it into a derivative action. Edward could not object to this course. If William was substituted as claimant, he could then, if he wished, apply for an indemnity for his costs under CPR 19.9(7).

[47]In those circumstances, in my judgment, the balance of convenience comes down in favour of restraining Incasep from pursuit of the Chancery action until judgment in the section 459 proceedings. As a consequence, Incasep may not incur further expenditure on legal or other professional services for the purposes of the Chancery action until further order. However, I would not order William or Susan to repay any costs at this stage. I do not consider that the high hurdle necessary before a mandatory interim injunction will be granted has been passed.

[48]Mr Hollington did not rely on section 151 of the Companies Act 1985, but accepted that it may very well be in point. For my part, in the light of the criminal sanctions imposed by section 151(3) and the fact that to procure a breach of section 151 would itself be a breach of trust by William and Susan, I would have wanted to consider whether there was or might be a breach of that section, if I had not been minded to allow the appeal.

[49]Finally, on this aspect of the case, Mr Hollington offered an undertaking, if this court considered that an order should be made restraining Incasep from pursuing the Chancery action, to repay the sums admitted to be due in Edward's defence. At the present time Edward would resist paying this amount because of his own counterclaim in the Chancery action for damages for wrongful dismissal which exceeds the amounts admitted to be due. In my judgment, as such an undertaking has been offered and it is clearly beneficial to Incasep, it should be accepted.

[50]The approach which I have set out above differs from that of the judge, who in effect decided the matter by rejecting Mr Hollington's wider submission. I agree with the judge in the result that the wider submission cannot succeed but for reasons which differ from those of the judge.

[51]The wider submission proceeds on the basis that ratification of the Chancery action by a board resolution of Incasep passed by William and Susan could not be said to be unfairly prejudicial to Edward. Further, Mr Hollington has not suggested that the passing of such resolution constituted a breach by William and Susan of their fidiciary duty to Incasep to act in what they consider to be Incasep's best interests and for no other purpose. Moreover, once that resolution is passed, the action is a duly authorised corporate action. It is not a derivative action and thus the court's discretion to permit it to continue under CPR 19.9 does not arise.

[52]Mr Hollington's argument is in the first instance founded on the proposition that: "It is a general principle of company law that the company's money should not be expended on disputes between the shareholders: see Pickering v Stephenson 1872) LR 14 Eq 322" (per Hoffmann J in Re Crossmore Electrical and Civil Engineering Ltd

(1989) 5 BCC 37

, 38).

[53]That principle clearly applies to participation by a company in section 459 proceedings brought by a member. However, there is no case where it has been applied in a duly authorised corporate action. As Mr Kosmin submitted, it is difficult to see how it can apply to such an action unless it is said that the action was brought under the authority of directors who were motivated not by the company's interests but by a desire to further the interests of shareholders. A corporate action could be brought which was in truth a shareholders' dispute, for example to set aside an irregular allotment of shares made by a previous board. This might be said to be a mirror image of a situation which arose in Re Sherborne Park Residents Co Ltd

[1986] 2 BCC 99

, 528. In that case Hoffmann J refused to make a pre-emptive order as to costs against the company in section 459 proceedings where it was claimed that there had been an irregular allotment of shares. Hoffmann J refused to make the order because, although the irregular allotment was a breach of the company's articles, in substance the petitioner was seeking a personal remedy, and thus it was not appropriate to make a pre-emptive order as to costs against the company.

[54]Circumstances of that kind may well, however, be very rare. In the present case Mr Hollington has not, in my judgment, shown that the Chancery action is in substance part and parcel of the shareholders' dispute. There is almost total overlap in the factual material but separate relief is claimed in favour of Incasep on the grounds of breach of duty to it. There is no suggestion that (but for the narrower submission) the action was one which could not be, or was not being, properly brought by Incasep. The fact that the same relief could have been claimed by William and Susan on a petition brought by them under section 459 does not mean that relief had to be sought in that way. The situation might have been very different if the Chancery action had clearly been brought in response to section 459 proceedings.

[55]In my judgment, Mr Hollington's wider submission amounts to this: William could not obtain a pre-emptive order as to costs if he was bringing a derivative action: see Halle v Trax. Accordingly, William should not have the benefit of Incasep using its own funds in the Chancery action. That does not follow, because the one is a derivative action and the other is not. It is only in a derivative action that the court has a discretion to permit the action to continue or make a pre-emptive order as to costs (CPR 19.9).

[56]Accordingly, in my judgment, it was unnecessary for the judge to be drawn into distinguishing Halle v Trax . Likewise, there is no need to me to deal with the basis on which he did so.

[57]In conclusion, I consider that the judge erred in two ways. First, I consider that the appellant was entitled to succeed on the narrower submission, which the judge did not address. Second, I consider that the judge was right to reject the wider submission. However, he did so on the basis that the Chancery action should be treated as if it were a derivative action, which it is not. If it was a duly authorised corporate action, the wider submission should, in my judgment, have been rejected for that reason.

[58]That leaves the question whether the judge should have required William to give a cross-undertaking in damages for the orders made against Edward excluding him from the premises of Incasep. These orders were made in the Chancery action. The judge, in my judgment, did not take into account that it may turn out that the Chancery action was wrongly brought in the name of Incasep. In my judgment, had he done so when determining who should give the cross-undertaking in damages, he would, in my judgment, have been bound to conclude that the court should continue to require William to give that crossundertaking.

[59]In the circumstances, I would allow this appeal. Mr

Justice Douglas Brown :

[60]I agree.

Lord Justice Rix :

[61]I also agree.

Order

Appeal allowed. Order as per draft minute. (Order does not form part of the approved judgment)