Bhullar v Bhullar & Ors [2015] EWHC 1943 (Ch)

Case No HC2014002010[2015] EWHC 1943 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Rolls Building, Fetter Lane,Date 07/07/2015
London, EC4A 1NL
Before
MR JUSTICE MORGAN
Between
INDERJIT SINGH BHULLARClaimantJATINDERJIT SINGH BHULLARDefendantsBHULLAR DEVELOPMENTS LIMITEDDefendantBHULLAR BROS. LIMITEDDefendant
Mr Edward Davies (instructed by Pannone Corporate LLP) for ClaimantMr Paul Chaisty QC and Mr Andrew Grantham (instructed by Mills & Reeve LLP) for First DefendantHearing Hearing date: 11 June 2015
Judgment

Introduction

[1]This is an application by the Claimant, a minority shareholder, for permission to continue a derivative claim in which it is alleged that the First Defendant, a director of two relevant companies (the Second and Third Defendants), was in breach of his fiduciary and other duties to the companies, resulting in loss to the companies and a benefit to the director. The claim is a double derivative claim so that this application is governed by common law principles and not by sections 260 to 264 of the Companies Act 2006.[2]If the case is one in which the court would be minded to grant permission to continue the derivative claim, then an important issue arises as to whether the court should grant to the Claimant a pre-emptive indemnity as to costs so that he would be indemnified out of the assets of the relevant companies in relation to his costs of bringing the claim, including any costs payable by him to the First Defendant pursuant to any order for costs which might be made against the Claimant.[3]Mr Davies appeared on behalf of the Claimant and Mr Chaisty QC and Mr Grantham appeared on behalf of the First Defendant.

The companies

[4]This case concerns three family owned companies. The three companies are Bhullar Bros. Limited (“BBL”), Bhullar Developments Limited (“BDL”) and Bhullar Limited (“BL”).[5]BBL is a private company, incorporated on 22 October 1964. At all material times, BBL has carried on the business of property development. In addition, BBL owns 50% of the issued share capital of Silvercrest Trading Limited.[6]BDL is a private company, incorporated on 5 November 1998. At all material times, BDL has carried on the business of property investment and development.[7]BL is a private company, incorporated on 2 March 2005. BL owns all of the issued share capital of BBL and BDL.[8]The family in question is the Bhullar family and the members of that family relevant for present purposes are the father, Sohan Singh Bhullar (“Sohan”), who died on 5 September 2008, the mother, Rajinder Kaur Bhullar, (“Rajinder”) and their two sons, Inderjit Singh Bhullar (“Inder”) and Jatinderjit Singh Bhullar (“Jat”). Satwant Kaur Sandhu, the sister of Inder and Jat, has provided a witness statement in connection with the present application.[9]The 1,132 issued shares in BL are owned as follows: Inder has 244 shares (22%), Jat has 466 shares (41%) and their mother, Rajinder has 422 shares (37%); these percentages are stated to two significant figures. Prior to Sohan’s death on 5 September 2008, Sohan and Rajinder held some 57% of the shares in BL.[10]The position as to the directorships of the three companies is as follows:(1) Sohan was a director of BBL, BDL and BL until his death on 5 September 2008;(2) Rajinder has been a director of BBL from 24 July 2007 until the present, a director of BDL from 3 August 2000 until the present and a director of BL at all material times until the present;(3) Jat has been a director of BBL, BDL and BL at all material times; and(4) Inder was a director of BBL, BDL and BL until he was removed from office on 28 April 2011.

The allegations of wrongdoing

[11]Inder makes a number of allegations of wrongdoing. The allegations are directed principally against Jat. These allegations fall into two categories. The first category concerns certain payments to a company, Torex Developments Limited (“Torex”) and the second category concerns the transfer to Jat of a property, referred to as Southgate B.[12]In June 2006, Jat acquired Torex, an off the shelf company. At all material times, Jat has been the sole shareholder and director of Torex. Torex commenced trading in around June 2007, carrying on the business of property development. Inder says that Torex is therefore a direct competitor of BBL and BDL but he does not identify any specific business activities of Torex in relation to which a remedy is claimed. The payments made to Torex which fall into the first category of allegations of wrongdoing are:(1) on 24 September 2007, BBL made a payment of £440,000 to Torex;(2) between 24 September 2007 and 27 September 2007, BDL made 16 payments to Torex, totalling £196,000;(3) on 21 August 2008, BDL made a payment of £335,446.37 to Torex.[13]Inder contends that these payments were made by BBL or BDL, as the case may be, as gifts to Torex. Jat contends that the payments were by way of loans and that £140,000 has been repaid to BBL (on 4 January 2008) and approximately £33,000 has been repaid to BDL (during 2009). Inder contends that if the payments were by way of loans, then they were not recorded in the books of BBL or BDL, were unsecured and no terms as to payment of interest or repayment of capital were agreed. Further, BBL was borrowing from its own bank in order to make payments to Torex. The amount still outstanding, ignoring interest, is £798,256.37. It is also said that Torex now has very significant debts and is likely to be unable to repay these loans, if that is what they were. Although Inder was at the relevant times a director of BBL and BDL he was not involved in any way with these payments to Torex. He contends that these payments by BBL and BDL to Torex were without the approval of the board of directors of BBL or BDL and without any approval by a resolution of BL (as sole member of BBL and BDL) and involved breaches of fiduciary duty by the other directors of BBL and BDL (to the extent that they were involved), including Jat. Further, Jat did not declare his interest in these transactions to the board of the relevant company, which at the relevant times included Inder.[14]As to Southgate B, Rajinder and Sohan, as directors of BDL, executed a transfer of that property to Jat on 5 October 2007 for a purchase price of £115,000. At that time, the property was a site for the construction of a house. Jat developed the site by erecting a house on it and he then resided in the house. I understand that Jat has since sold the property. Although Inder was at the relevant time a director of BDL, he says that he was not involved in connection with this transfer. Indeed, he says that he had earlier refused to sign a transfer of the property to Jat and did not know that a transfer had then been executed by two other directors. He contends that the transfer was without the approval of the board of directors of BDL and without any approval by a resolution of BL (as sole member of BDL) and involved breaches of fiduciary duty by the other directors of BDL, including Jat. Further, Jat did not declare his interest in this transaction to the board of BDL, which at the relevant time included Inder. Contrary to section 190 of the Companies Act 2006, Jat did not obtain approval for the transfer by resolution of the members of BDL and BL with the result that Jat is liable, under section 195(3) of the 2006 Act, to indemnify BDL for any loss or damage resulting from the transfer and to account to BDL for any gain which he has made directly or indirectly by reason of the transfer.[15]Inder contends that BBL and BDL have suffered loss by making gifts, or unsecured and interest free loans, to Torex. He also contends that BDL has suffered loss, and Jat has received a benefit, as a result of the transfer of Southgate B to Jat. Inder says that the transfer was at an undervalue and deprived BDL of the opportunity of making a profit by developing the property itself. Inder seeks an account and inquiry in relation to the losses made by the relevant company and/or of the profits made by Jat.[16]For the purposes of the application which is before me, Jat accepts that there is a prima facie case that:(1) he acted in breach of duty in relation to the payments to Torex;(2) in relation to Southgate B he acted in breach of duty by failing formally to declare his interest in the transaction; and(3) there was no sufficient contemporaneous or subsequent ratification of the transactions.

The application

[17]On 22 December 2014, Inder issued these proceedings naming three Defendants, Jat, BBL and BDL. The claim was expressed to be a derivative claim relying on causes of action against Jat for various breaches of duty as described above. The causes of action which are asserted are causes of action which belong to BBL or BDL, as the case may be. Inder is not a member of BBL or BDL but he is a member of BL, which wholly owns BBL and BDL. The derivative claim is therefore a double derivative claim and is not within sections 260 to 264 of the Companies Act 2006. Nonetheless, CPR 19.9 provides that Inder may not take any further step in these proceedings without the permission of the court. Accordingly, Inder now applies for permission to continue these proceedings as a double derivative claim asserting causes of action belonging to BBL and BDL against Jat.

The issues

[18]The issues which have been identified on this application are:(1) does the court have jurisdiction in relation to a double derivative claim following the enactment of sections 260 to 264 of the Companies Act 2006?(2) has Inder established a prima facie that BBL and BDL are entitled to the relief claimed against Jat?(3) for the purposes of issue (2) above, has Inder established a prima facie case that Jat cannot successfully rely on a limitation defence in relation to the payments to Torex?(4) has Inder established a prima facie case that the case falls within the exception to the rule in Foss v Harbottle (1843) 2 Hare 461? In relation to this issue, a number of sub-issues were raised, as follows: a) is this a case of actual fraud? b) did Jat benefit from the alleged wrongdoing? c) is there “wrongdoer control” of BBL and BDL? d) could a reasonable board of directors of the relevant company consider it appropriate to bring these claims?(5) should the court direct that Inder is to be indemnified out of the assets of the relevant company and/or BL for his costs in bringing these claims, such costs to include any adverse orders for costs made against him?

Jurisdiction

[19]Before the coming into force of the Companies Act 2006, the common law appeared to provide for the possibility of a double (or multiple) derivative claim. In Universal Project Management Services Ltd v Fort Gillicker Ltd [2013] Ch 551, it was held that the common law did indeed provide for the possibility of a double (or multiple) derivative claim and that the court’s jurisdiction in that respect had not been taken away by sections 260 to 264 of the Companies Act 2006. That decision has since been followed, in particular in Abouraya v Sigmund [2014] EWHC 277 (Ch). For the purposes of the present application, Mr Chaisty did not invite me to do anything other than apply those decisions. He reserved his position in relation to any future occasion on which this question might arise. Accordingly, I will proceed on the basis that the court has jurisdiction to permit a double derivative claim.[20]In connection with each claim which Inder wishes to put forward in this derivative action, I need to be satisfied that there is a prima facie case that the relevant company, BBL or BDL, is entitled to the relief claimed against Jat. The standard of a prima facie case is established by the judgment of the Court of Appeal (admittedly obiter on this point) in Prudential Assurance v Newman Industries [1982] Ch 204 at 221H - 222B. As explained in Konamaneni v Rolls Royce (India) Ltd [2002] 1 WLR 1269 at [31] to [33], the standard of a prima facie case is to be contrasted with two other possibilities which have been rejected. The first rejected possibility was that one assumed that the facts alleged by the minority shareholder were true. The second rejected possibility was that one had a full trial on the merits as to the facts alleged.[21]In Abouraya v Sigmund at [53], David Richards J said:
“A prima facie case is a higher test than a seriously arguable case and I take it to mean a case that, in the absence of an answer by the defendant, would entitle the claimant to judgment. In considering, whether the claimant has shown a prima facie case, the court will have regard to the totality of the evidence placed before it on the application.”
[22]In the course of the hearing before me, counsel disagreed somewhat as to the strength of the case that had to be shown to satisfy the requirement of a prima facie case, particularly where one took into account the evidence on which the defendant intended to rely by way of a suggested answer to the claimant’s case.[23]The phrase “a prima facie case” is very well known and often used. I have been a little surprised to find that there is not complete clarity as to what the phrase means. Indeed in R v Governor of Brixton Prison ex parte Armah [1968] AC 192 at 229, Lord Reid said:
“The matter has been further complicated by the frequent use of the phrase "a prima facie case." That phrase is not self-explanatory: what is it that the case shows prima facie or at first sight? Is it that on the evidence as it stands at the moment the accused would seem to be guilty, or is it that the evidence contains allegations set out in such a way that further investigation is justified? I would hope that a less ambiguous phrase will be used especially in any future legislation.”
[24]In American Cyanamid v Ethicon Ltd [1975] AC 396, counsel submitted to the House of Lords (at 399B) that “prima facie” could have many meanings and Lord Diplock remarked (at 404F) that “prima facie case” might in many contexts be an elusive concept. Before that decision, on an application for an interim injunction, the court asked itself whether the claimant had shown a prima facie case (see the detailed discussion of the earlier authorities at 406H – 407F) and in that context, for the purposes of reaching an interlocutory judgment, the court asked itself what judgment was then appropriate on the basis of the then existing evidence, even though that evidence was conflicting and even though the court did not have the benefit of oral testimony or cross-examination: see per Lord Diplock at 404G – 405B.[25]It is one thing to ask whether the claimant has shown a prima facie case in the absence of an answer from the defendant and another thing to ask whether the claimant has still shown a prima facie case when one takes into account the suggested answer. If the facts relied upon by either the claimant or the defendant are not disputed, there may be little difficulty. But what if the claim and the suggested answer depend, as they often will, on disputed facts? Further, what if the resolution of that dispute will in due course require the trial judge to reach conclusions as to the credibility of witnesses? I consider that the court has to recognise that it cannot resolve disputes of fact at a hearing which does not involve any cross-examination of witnesses and which takes place in advance of any formal disclosure of documents. It will not be unusual to find that the claimant can establish a prima facie case, if one ignores the evidence relied upon by the defendant, but yet the claimant would fail at trial if the defendant’s evidence were to be accepted. In such a case, I consider that it is still open to the court to hold that the claimant has made out a prima facie case because it would be wrong to assume that the defendant’s evidence will be accepted at the trial and it may simply not be possible to predict with any degree of confidence whether the defendant’s evidence will be so accepted.[26]In the present case, it is not necessary to go further towards a definition of what is meant by a prima facie case. Despite some lack of clarity as to the meaning of the phrase, it does not seem to have caused much difficulty in practice and, in the end, it does not cause real difficulty here. In any event, in this case, I will have to form some view as to the strength of the case against the defendant because I will later in this judgment have to address the question whether a reasonable board of directors of the relevant company could consider it appropriate to bring a claim against the defendant. There are several reported cases where the court has formed a view as to the strength of the claim against the defendant for that purpose.[27]I will now separately consider the two categories of alleged wrongdoing. The first category concerns the payments to Torex. Mr Chaisty accepts that there is a prima facie case of a breach of duty by Jat in relation to these payments. However, Mr Chaisty submits that the claim by the relevant company for equitable compensation for breach of duty is plainly statute barred. He relies on section 21(3) of the Limitation Act 1980. It is indeed the case that the payments in question were made to Torex more than 6 years before the issue of the claim form on 22 December 2014. Mr Davies contends that the claims are not statute barred and he relies on section 21(1) of the Limitation Act 1980. Mr Davies accepts that it is clear in this case that Jat will seek to rely on a limitation defence and so Mr Davies accepts that he must persuade me that Inder has a prima facie case that the limitation defence will fail.[28]There was substantial agreement as to the operation of section 21 of the Limitation Act 1980 in this case. Section 21 refers to “any breach of trust” but that phrase includes a breach of fiduciary duty of the kind alleged in this case. It is accepted that if the alleged breaches of fiduciary duty were not dishonest on the part of Jat, then Jat has a good limitation defence. Conversely, if the breaches were dishonest, Inder can rely on section 21(1) to establish that there is no relevant period of limitation for the claims against Jat. A director, as a fiduciary, will be dishonest if he pursues a course of action, either knowing it is contrary to the interests of the company or being recklessly indifferent whether it is contrary to its interests. If a director acts in a way which he does not honestly believe is in the interests of the company, then he is acting dishonestly. These propositions are taken from Gwembe Valley Development v Koshy [2004] 1 BCLC 131 at [131] applying Armitage v Nurse [1998] Ch 241 at 251,260.[29]I have been provided with witness statements from Jat and Rajinder as to the circumstances in which BBL and BDL made payments to Torex. I also have a witness statement on that subject from Inder and Jat’s sister, Satwant. These witnesses appear to agree on a number of matters. It appears that it was Sohan who took the lead in relation to the decision that BBL and BDL should make payments to Torex. Having regard to what these three witnesses say about Sohan’s reasons, there seems to me to be a clear prima facie case that Sohan did not honestly believe that the payments were in the interests of BBL or BDL. Accordingly, there is a prima facie case that Sohan was dishonest. As Jat was also a director of BBL and BDL at the relevant times and knew Sohan’s reasons for his actions and because Jat’s wholly owned company, Torex, was the beneficiary of Sohan’s dishonesty, I consider that there is a prima facie case that Jat also committed a dishonest breach of fiduciary duty.[30]It follows that Inder has established that there is a prima facie case of breach of duty in relation to the payments to Torex and that the resulting claim to compensation is not statute barred.[31]As regards the transfer of Southgate B, Mr Chaisty accepts there is a prima facie case of breach of duty and failure to comply with section 190 of the Companies Act 2006. Jat does not put forward any limitation defence in relation to this part of the claim.[32]The rule in Foss v Harbottle is, so far as relevant, that the right to sue a director for a breach of his duty owed to the company is a right which is vested in the company and which cannot normally be pursued by a shareholder of the company. The relevant exception to the rule is that a shareholder will be allowed to bring such a claim, by way of a derivative action, where there is a “fraud on the minority”.[33]If the wrongdoing amounts to actual fraud, then there is clearly “fraud” for the purposes of the exception. If the wrongdoing does not involve actual fraud but consists of a breach of fiduciary duty or negligence, then it must be shown that there is a prima facie case that there was a benefit or profit for the wrongdoer.[34]In view of my earlier findings (for the purposes of section 21(1) of the Limitation Act 1980) that there is a prima facie case of dishonesty in relation to the payments to Torex, it follows that (in relation to those payments) this is a case of fraud and not merely a case of breach of fiduciary duty or negligence. In any case, in relation to those payments, there was a clear a benefit to Torex. I consider that a benefit to Torex, which has throughout been wholly owned by Jat, is for present purposes a benefit to Jat.[35]I next consider the alleged wrongdoing in relation to Southgate B. I need to consider whether there is a prima facie case of dishonesty or, alternatively, whether the transaction involved a benefit to Jat. In relation to both alternatives, it is relevant to consider whether the sale was at an undervalue. Both sides’ evidence on that question is unimpressive. Inder asserts that the sale was at an undervalue. In his witness statement, he says that he believes that the land would have been worth £240,000 (the price paid was £115,000). However, Inder does not say on what this belief is based. He does not say that he has any relevant expertise in assessing the value of the land (although it is conceivable that he might have). He has known about the transfer of the land to Jat since January 2009 yet he does not say whether he has taken advice as to the value of the land nor what that advice might have been. I infer that he has not taken such advice. Jat says in his witness statement that he agreed with his parents that they would have the land valued by an estate agent, Simon Blyth, and he adds:
“[t]he price of £115,000 was based on that”
. However, Jat does not say in terms what Simon Blyth’s advice was and the relationship between any value identified by Simon Blyth and the actual price.[36]On this state of the evidence as to the value of Southgate B, I am not able to conclude that there is a prima facie case that the land was sold at an undervalue. There is certainly no prima facie case of loss to BDL. There was a benefit to Jat in the sense that he acquired the land and was able to build a house on it, live in the house and in due course sell the house and land. However, if Jat paid the market value for that opportunity then I doubt if those matters represent a benefit for present purposes. As to whether the sale was dishonest, it is possible that Sohan adopted the same attitude in relation to the transfer to Jat as he adopted when he approved the payments to Torex. However, in the absence of a prima facie case that the land was sold at an undervalue, I am not persuaded that there is a prima facie case of dishonesty on the part of Sohan and/or Jat. These findings mean that Inder has not established a prima facie case that there was a fraud on the minority in relation to the sale of Southgate B. These findings are based on the present state of the evidence and may have to be reviewed if better evidence were later put forward that the sale was at an undervalue.[37]I next consider the contentions as to whether this is a case of wrongdoer control. Currently, the directors of BBL, BDL and BL are Jat and Rajinder. As one of two directors, Jat has negative control of the boards of all three companies as he can prevent there being a majority on any resolution of the board as to whether BBL or BDL should sue Jat. Jat has 41% of the shares in BL and so does not by himself have control of BL in general meeting. However, Jat and Rajinder have 78% of the shares in BL, whereas Inder has only the remaining 22% of those shares. Between them Jat and Rajinder can block any resolution of the shareholders of BL to authorise BBL and BDL to sue Jat. Mr Chaisty submits that Inder has not shown the necessary wrongdoer control in this case because he does not allege that Rajinder is a wrongdoer. I do not agree. It is true that Inder has not joined his mother as a defendant and he does not wish to do so. However, the substance of his allegation against Jat implicates Rajinder in the alleged wrongdoing. I consider that enables Inder to show a prima facie case of wrongdoer control exercised by Jat and Rajinder.[38]I next consider the likely attitude of reasonable independent boards of directors of BBL and of BDL to the claim against Jat. It was common ground that I should ask whether an independent board could (rather than would) reach the conclusion that it was appropriate to bring proceedings against Jat: see Airey v Cordell [2007] BCC 785. In Iesini v Westrip Holdings Ltd [2010] BCC 420, Lewison J (as he then was) said the following, referring to the range of factors which might be relevant to the decision of the board:
“They include: the size of the claim; the strength of the claim; the cost of the proceedings; the company’s ability to fund the proceedings; the ability of the potential defendants to satisfy a judgment; the impact on the company if it lost the claim and had to pay not only its own costs but the defendant’s as well; any disruption to the company’s activities while the claim is pursued; whether the prosecution of the claim would damage the company in other ways (e.g. by losing the services of a valuable employee or alienating a key supplier or customer) and so on. The weighing of all these considerations is essentially a commercial decision, which the court is ill-equipped to take, except in a clear case.”
[39]On the evidence before me, I consider that an independent board could reasonably conclude, having regard to the size and strength of the claim and the likely level of costs involved, that it was appropriate to sue Jat for the substantial sum of nearly £800,000 (i.e. the outstanding sums paid to Torex), to which interest should be added. I also consider that an independent board could reasonably conclude that it should not decline to pursue Jat by reason of considerations such as the management time involved or any disruption caused by the relevant company being involved in litigation against a director.[40]As regards Southgate B, I have already held that Inder has not made out a prima facie case that there was a fraud on the minority in relation to that transaction; I so held because there was no reliable evidence that the sale was at an undervalue. If I had held otherwise, I would not have held that a reasonable independent board would have considered it was appropriate to bring proceedings against Jat in relation to Southgate B on the information which is available at present. I consider that such a board would first have wanted to take detailed advice as to the value of the land at the time of the sale to Jat.[41]There was considerable evidence as to the relationship between Inder and Jat in recent years and the current position in relation to the relevant companies. This was said to be relevant to a submission made by Mr Chaisty that I should not permit Inder to bring these derivative proceedings because a petition by Inder under section 994 of the Companies Act 2006 would be the more appropriate course for him to follow.[42]It is not possible on this application to make firm findings as to the many matters in dispute as to the cause of the breakdown in the relationship between Inder and Jat and as to the claims and the cross claims which they make. However, from the evidence, the following matters emerge:(1) the breakdown in the relationship between Inder and Jat is long standing;(2) the origins of the breakdown pre-dated the events which Inder now says amount to wrongdoing by Jat;(3) Inder has known about the September 2007 payments to Torex since early 2008;(4) it is less clear when Inder became aware of possible wrongdoing in relation to the August 2008 payment to Torex; the full picture in relation to that matter only appeared in the course of the present proceedings;(5) Inder has known of the transfer of Southgate B to Jat since early 2009;(6) there has been correspondence between solicitors for Inder and Jat since 2008;(7) for some considerable time, Inder has not been involved in running the affairs of BBL or BDL;(8) Jat has made allegations of wrongdoing against Inder in relation to Silvercrest Trading Ltd;(9) for a considerable time, Jat has been suggesting a formal split between himself and Jat in relation to the companies; Jat has offered to buy Inder out;(10) Rajinder has supported Jat’s suggestions of a formal split between Inder and Jat;(11) the claims and cross-claims between Inder and Jat are much wider than the allegations of wrongdoing made in the derivative claim.[43]In his evidence in this case, Inder has accepted that it would be desirable to come to an agreement with Jat as to the future of the companies. However, he states that unless and until the issues raised in the derivative claim are resolved, by agreement or by judicial determination, then it will not be possible for a fair overall settlement to be reached. Inder suggests that Jat’s approach to a formal split between them will not acknowledge his liability to the companies which Inder says will be established in the derivative claim.[44]In relation to Mr Chaisty’s submission that I should refuse Inder permission to continue this derivative claim, I accept that it would be open to Inder to bring section 994 proceedings and in the course of those proceedings to ask the court to determine the issues raised in the derivative claim. However, I do not accept that I should refuse permission to Inder to pursue the derivative claim on this ground. The issues in the derivative claim (even if one included the claim in relation to Southgate B) are relatively narrow and self-contained. The issues in section 994 proceedings would be significantly wider. Section 994 proceedings would be slow and expensive if they proceeded all the way to a trial. Both parties would be very well advised to compromise section 994 proceedings long before any such trial. I can see that there would be a real advantage to Inder if he were able to establish what he alleges in the derivative claim before negotiating a formal split between himself and Jat.[45]I am also satisfied that Inder is acting bona fide in wishing to pursue this derivative claim. If the claim succeeds, BBL and BDL will benefit. Inder will also benefit as a shareholder in BL, the holding company of BBL and BDL. The fact that a successful derivative claim will also be of benefit to Inder in negotiations with Jat as to a formal split does not mean that a derivative claim is not bona fide on the part of Inder. I think that it is likely that Inder’s wish to pursue a derivative claim is significantly influenced by his hope that he will be awarded a pre-emptive indemnity as to costs in relation to the derivative claim whereas he could not expect such an indemnity in relation to section 994 proceedings. I will later consider whether it is appropriate in this case to grant a pre-emptive indemnity. However, at this stage I can say that Inder’s hope that he will be granted such an indemnity does not mean that he is not acting bona fide in pursuing a derivative claim.[46]The matters which I have discussed so far point to a decision that the court should permit Inder to continue a derivative claim in relation to the payments made to Torex, but not in relation to the transfer to Jat of Southgate B. However, before making a final decision on that point, I wish to consider the part of Inder’s application which seeks a pre-emptive order granting him an indemnity as to costs.

An indemnity as to costs?

[47]In his application notice, Inder applied for an order giving him an indemnity out of the assets of BBL and/or BDL in respect of his costs. The indemnity sought would cover Inder’s own costs to the extent that they were not recovered from Jat pursuant to an order of the court made in the course of, or at the end of, the proceedings against Jat. The indemnity sought would also cover any adverse order for costs made against Inder and in favour of Jat, in the course of, or at the end of, those proceedings.[48]The indemnity sought was an indemnity out of the assets of BBL and/or BDL. These two companies have different claims against Jat. It is difficult to see why BBL should be liable to indemnify Inder in so far as Inder brings a derivative claim in relation to a cause of action belonging to BDL, and vice versa. At the hearing, Mr Davies submitted that Inder should have an indemnity out of the assets of BL in relation to all of the claims against Jat. I do not think that would be right. That would effectively amount to an order that the assets of BBL would be available to meet the costs of proceedings in the name of BDL, and vice versa.[49]There is no doubt that the court has power to order that Inder should be indemnified out of the assets of the relevant company in relation to his own costs and any adverse order for costs made against him. If at the end of the proceedings against Jat, Inder’s derivative claims succeeded but he did not obtain full recovery of his costs from Jat, the court would have power to order that he be indemnified by the relevant company. Further, even if Inder’s derivative claims against Jat failed, the court would nonetheless have power to order that Inder be indemnified by the relevant company in relation to his own costs and any adverse order for costs against him.[50]However, Inder does not wish to leave the question of a possible indemnity to the trial judge at the end of the proceedings. He wishes to know in advance that, win or lose, he will have an indemnity as to his costs out of the assets of the relevant company. The point is made on behalf of Inder that if the action succeeds the proceeds of the action will be taken by the companies and not by Inder personally. In such a case, it is said that the costs of the claims should be borne by the companies and not by Inder personally. There would be a mis-match if the potential benefits of the proceedings were taken by the companies and the risk of the proceedings was borne by Inder personally. He wants a pre-emptive order for such an indemnity which will take the matter out of the hands of the trial judge at the end of the proceedings. Even if the trial judge then thought that such an indemnity was not appropriate, he would not be able to disturb the pre-emptive order.[51]On behalf of Inder, Mr Davies submits that the court has power to make a pre-emptive order of this kind. He says that the court has such a power pursuant to CPR 19.9E. He also says that the case law shows that the court has such a power and, furthermore, that a pre-emptive order for an indemnity is the normal order in a case where the court permits the continuation of a derivative claim.[52]Mr Chaisty accepts that the court has power to make a pre-emptive order of that kind sought by Inder. However, it is submitted that if I grant Inder permission to bring the derivative claims and make a pre-emptive order for an indemnity in relation to costs, that places Inder at a considerable advantage over Jat and that advantage could be abused in relation to the conduct of the litigation and in any negotiations for settlement. If there were a pre-emptive order for an indemnity, both Inder and Jat would know that whether Inder succeeded or failed, the burden of costs would fall on the companies in relation to which Inder was only a 22% shareholder and Jat and Rajinder (who supports Jat) are 78% shareholders. It is submitted that the unfairness to Jat would be particularly marked in a case where Inder failed and Jat was awarded his costs and where Inder was able to be indemnified against those costs by the relevant company.[53]Before reaching my decision on this point, I need to identify the relevant principles. The starting point is obviously the litigation which resulted in two decisions of the Court of Appeal, Wallersteiner v Moir [1974] 1 WLR 991 and Wallersteiner v Moir (No. 2) [1975] QB 373. The court consisted of Lord Denning MR and Buckley and Scarman LJJ. In his first judgment, Scarman LJ said at [1974] 1 WLR 991 at 1034F:
“I would suggest that the case illustrates the need for a profound rethinking of the processes available under our law for the investigation and determination of questions concerned with the control and use of companies’ funds by directors and others in a position to influence their use.”
[54]In the further judgments of the Court of Appeal reported at [1975] QB 373, there is a detailed discussion as to the court’s power to award an indemnity to a minority shareholder who brings a derivative claim: see at 391G-392F, 403C-405D and 407A-E. The court approved a procedure applicable to a minority shareholder, modelled on the procedure available for a trustee (Re Beddoe [1893 1 Ch 547, 557-558), who wishes to obtain the sanction of the court to the commencement of proceedings. Lord Denning envisaged that on such an application, the court would ask itself whether there was a reasonable case for the minority shareholder to bring at the expense (eventually) of the company. Buckley LJ described the intended procedure in more detail and he said at 405B-C:
“Upon the effective hearing of the summons the court would determine whether the plaintiff should be authorised to proceed with the action and, if so, to what stage he should be authorised to do so without further directions from the court. The plaintiff, acting under the authority of such a direction, would be secure in the knowledge that, when the costs of the action should come to be dealt with, this would be upon the basis, as between himself and the company, that he has acted reasonably and ought prima facie to be treated by the trial judge as entitled to an order that the company should pay his costs, which should, I think, normally be taxed on a basis not less favourable than the common fund basis, and should indemnify him against any costs he may be ordered to pay to the defendants.”
[55]Buckley LJ refers to the court determining whether the minority shareholder “should” be authorised to proceed with the action although, in a later passage, he also contemplated the possibility that the minority shareholder would be able to proceed even if he did not have the authorisation of the court. Buckley LJ did not appear to contemplate a pre-emptive order for costs because he referred to the question of costs being dealt with by the trial judge and at that stage the minority shareholder ought “prima facie” to be treated as entitled to an indemnity from the company.[56]Scarman LJ at 407C referred to the minority shareholder applying for leave to bring proceedings “at the expense of the company”; that suggests that he considered that the court would, on such an application, decide whether the shareholder would be indemnified by the company.[57]It should be noted that the facts of Wallersteiner v Moir placed that case at the top end of the spectrum of cases in which it is suggested that a minority shareholder should be indemnified by the company. That case involved proven serious wrongdoing where the minority shareholder would receive no, or very little, personal benefit; further, the minority shareholder had already expended a great deal of time and money on the litigation but had no money left to bring it to a satisfactory conclusion.[58]In accordance with the principles in Wallersteiner v Moir (No. 2), courts in later cases have made pre-emptive indemnity costs orders. An example is Jaybird Group Ltd v Greenwood, decided in 1981, and reported at [1986] BCLC 319.[59]In other cases, concerns have been expressed at the implications of a minority shareholder being permitted to litigate at the expense of the company. In Smith v Croft [1986] 1 WLR 580, Walton J said at 583D-F:
“It is, of course, not for me to question the correctness of the decision of the Court of Appeal in Wallersteiner v Moir (No. 2), but I may observe that the justice of an order which may throw upon a company which, in the event, is proved to have no cause of action whatsoever against the other defendants, who may prove to be completely blameless, the entire costs of an action which it did not wish to be prosecuted, is extremely difficult to comprehend. The real injustice of the situation lies in the encouragement which the Court of Appeal gave to the application for such an order being made at the commencement of the action, at a time when, of necessity, the plaintiffs believe that they have a good case, and will with hand on heart swear that they have, and before the completion of discovery and inspection, which may well show that their beliefs, though honestly enough held, are not in fact well founded. It is to be observed that in Wallersteiner v Moir (No. 2) the application was made at a late stage in the proceedings, after Mr. Moir (who was the plaintiff by counterclaim) had already substantially succeeded, but who had no powder and shot left to finish the battle. The manifest justice of such an order in favour of a person in such a position is plain enough.”
[60]In that case, at page 588B-F, Walton J also commented on the differences between a claim by a trustee for the court’s sanction on a Beddoe application and a claim by a minority shareholder for permission to litigate at the expense of the company. Walton J commented that in the latter case an order which gave the minority shareholder an indemnity, the burden of which would fall to an extent on a defendant who was also a shareholder, could not be subsequently corrected to prevent injustice.[61]In Halle v Trax BW Ltd [2000] BCC 1020, Scott J upheld the decision of a Master not to grant an indemnity to a plaintiff in a derivative action. In that case it was significant that the plaintiff and the defendant each owned 50% of the shares in the relevant company. That enabled the judge to say that the plaintiff was not a minority shareholder and the defendant was not in control of the company so that the case was not a typical case. The judge also dealt with the orders for costs that might be made at a trial of the claim. He said that it would be quite unfair to the defendant if, following the failure of the claim, the company of which he was a 50% shareholder would have to bear the costs of the unsuccessful claim.[62]It is also relevant to refer to some of the discussion in McDonald v Horn [1995] ICR 685 although that was not a case of a derivative action brought by a minority shareholder; it was a claim by members of a pension scheme against their employers, the pension fund trustees and others. The claimants applied to the judge and obtained a pre-emptive order that the claimants should be entitled to an indemnity out of the pension fund in relation to the claimants’ own costs and any adverse order made against the claimants. The Court of Appeal held that the judge had jurisdiction to make such an order and had acted within his discretion in making the order. In his judgment, Hoffmann LJ (with whom Hirst and Balcombe LJJ agreed) referred to the principles which apply when trustees and other fiduciaries apply for an indemnity out of the relevant fund; he referred to re Beddoe and described that procedure as giving a trustee or fiduciary “full assurance” as to costs. He then described how those principles had been extended to certain claims by beneficiaries under trusts. He explained that in a case where it was not clear what order would be appropriate following a trial, the court should be very reluctant to make a prospective order. He then referred to the practice in relation to derivative actions and discussed whether that practice should be applied to claims by members of pension funds. He held that it was appropriate to apply that practice to such claims. He then discussed how the court’s discretion might be exercised. He said that it would be relevant if the allegation of wrongdoing would not be investigated if the pre-emptive order were not made. He held that the fact that a pre-emptive order might ultimately be a burden on a defendant who succeeded in resisting the claim was a relevant matter but did not preclude the making of such an order. He then stated that the power to make such an order should be exercised “with considerable care” and he referred to the comments of Walton J in Smith v Croft which I have cited above.[63]Wishart v Castlecroft Securities Ltd [2010] BCC 161 is a decision of the Inner House of the Court of Session in relation to sections 265 to 269 of the Companies Act 2006, which apply in Scotland in relation to applications for permission to continue a derivative action. The judgment of the court was given by Lord Reed. It was held that the court in Scotland had jurisdiction to grant the claimant an indemnity in relation to his costs (called “expenses” in Scotland). Lord Reed referred to the decision in McDonald v Horn and to Hoffmann LJ’s statement that the power to make a pre-emptive order granting an indemnity should be exercised with considerable care. Lord Reed stated that “ordinarily” a court giving a claimant permission to pursue a derivative action would make a pre-emptive order granting an indemnity but there would be cases where the court would hesitate to grant permission if the effect of doing so were to require the company to indemnify the claimant even if the proceedings failed; see at [60]. The court could limit the indemnity to the amount recovered for the company: see at [60].[64]At [68], Lord Reed explained:
“If a finding is to be made, at the stage when leave is granted, as to the shareholder's entitlement to be indemnified in respect of liabilities and expenses which may be incurred in the future, the terms in which the finding is made should reflect the fact that there is a limit to the extent to which the court can assess, in advance, the reasonableness of his having incurred any particular liability or expense, and therefore the appropriateness of an indemnity. The dangers of the court's writing a blank cheque for the shareholder as to the amount of expenses which he can incur in the derivative proceedings are obvious. That has a number of implications. First, the court must be satisfied that it is necessary for such an order to be made prospectively, rather than the shareholder's entitlement to indemnification being considered after the expenses have been incurred. We do not however doubt that there may in appropriate cases be compelling reasons for finding the member entitled to be indemnified at the stage when leave is granted: in particular, as Buckley L.J. explained in Wallersteiner v Moir (No.2) at 399, minority shareholders may require the assurance of a prospective order so that they are not deterred from bringing derivative proceedings, where such proceedings ought to be brought, by the risk of incurring not only their own expenses but also a liability for the expenses of the defenders. Secondly, in cases where a prospective finding is appropriate, it makes sense for such findings to be made on a staged basis: that is to say, a finding can be made in respect of liabilities and expenses incurred up to a specified stage in the derivative proceedings, reserving leave to the shareholder to apply in the leave proceedings for a further finding once that stage has been reached. The appropriate stages will depend upon the circumstances, including the nature of the procedure which is anticipated in the derivative proceedings. … Although it may be desirable that the member should be able to embark on the derivative proceedings in the confident expectation that he will be indemnified against outlays and liabilities which have been reasonably incurred, the court cannot definitively prejudge the question whether all his future outlays and liabilities have been so incurred. A reasonable offer in settlement, for example, might be made at any time, rendering the further prosecution of the derivative proceedings unreasonable. Even if leave were granted on a staged basis, the possibility of a material change of circumstances occurring during the intervening period could not be excluded. For these reasons, it appears to us that a prospective finding that the shareholder is entitled to be indemnified should not be unconditional, but should reserve leave to the company to apply for the finding to be modified in the event of a material change of circumstances.”
[65]In Kiani v Cooper [2010] BCC 463, one of two equal shareholders (who were also the only directors) wished to bring a derivative claim against the other. The court gave permission for such a claim under sections 260 to 264 of the Companies Act 2006. The court granted to the claimant shareholder a pre-emptive indemnity as to costs out of the assets of the company in relation to the claimant’s own costs but not in relation to any adverse order for costs. Halle v Trax BW Ltd was not referred to in the judgment and it seems likely that it was not cited to the court.[66]Hughes v Weiss [2012] EWHC 2363 (Ch) was another case of a company with two equal shareholders who were both directors. The court permitted one shareholder to bring a derivative claim against the other. The claimant shareholder failed to obtain a pre-emptive indemnity as to costs. It was said that the prima facie rule was that the claimant shareholder would be granted a pre-emptive indemnity but that the rule was not applied invariably or without regard to the facts of the particular case.[67]In Partners in Henderson Fund II LLP v Henderson Fund II LLP [2013] QB 934, Cooke J considered a number of issues in relation to proposed proceedings in relation to the affairs of a limited partnership, rather than a company. In that case, the limited partners wished to bring derivative claims against the general partner and a manager of the limited partnership. The judge held that the limited partners should be allowed to bring derivative claims on behalf of the limited partnership. The limited partners applied for a pre-emptive indemnity (as to costs) out of the assets of the limited partnership. The judge considered McDonald v Horn and held that it was not inevitable that the limited partners would be bound to obtain an indemnity at the end of the trial; further, there was no reason why the general partner, which was liable for all the debts and obligations of the fund, should be prejudiced by the payment of the unsuccessful claimants’ costs out of that fund: see at [71]-[76][68]These are the principal authorities which should guide my decision in this case. The leading case remains Wallersteiner v Moir (No. 2) but the later decisions contain helpful guidance as to how the relevant principles are to be applied in practice. I also draw attention to one point which could justify a qualification of the principles stated in Wallersteiner v Moir (No. 2). As I read that decision, the Court of Appeal approved a procedure whereby the minority shareholder could apply to the court for the court’s approval to the derivative proceedings. On such an application, just as in the case of a Beddoe application, the court would consider whether the company (acting through the minority shareholder) should bring the claim. As this jurisdiction has developed, the court is now asked a slightly different question, which is whether an independent reasonable board of directors could think that it should bring the claim. In the present case, I have held that such a board could think that but I have not addressed myself of the question whether the company should bring the claim.[69]The later authorities show that the court should exercise considerable care when deciding whether to order a pre-emptive indemnity. The court should have a high degree of assurance that such an indemnity would be the proper order to make following a trial on the merits of the claim. In the present case, Jat will plead a defence of limitation to the claim to recover the payments made to Torex. Inder will allege that Jat was dishonest. I have held that Inder has shown a prima facie case of dishonesty but the claim might fail. If it emerges at the trial that Jat was not dishonest and an order for costs is made in favour of Jat against Inder, it is not obvious that in all cases the trial judge would award Inder an indemnity in relation to the adverse order for costs. Similarly, it would not be obvious in such a case that Inder should have an indemnity for his own costs. Conversely, if the claim succeeded and Jat was held to have been dishonest, then Inder could expect to obtain an order for costs against Jat and an indemnity from the relevant company in relation to any reasonably incurred costs which for some reason were not recovered from Jat. Inder would have that expectation even without the certainty which he would have pursuant to a pre-emptive order for an indemnity.[70]There is a further consideration in this case. If Inder brought section 994 proceedings against Jat, both Inder and Jat would be in the same position in that they would both be on risk as to costs. Based on my earlier findings, this is a case where Jat positively wished there to be a formal split between himself and Inder and Inder accepts that a formal split is desirable. Inder has explained in his evidence that the justification for derivative proceedings is that those proceedings will determine certain points in dispute between himself and Jat and then Inder and Jat can negotiate (or litigate under section 994) so as to bring about a formal split between them. Viewed in that light, these derivative proceedings are a stepping stone towards a negotiation for a formal split or for section 994 proceedings. I consider that the costs position in relation to these derivative proceedings should be the same as the costs position in relation to section 994 proceedings generally. Inder and Jat should be treated equally and each of them should be on risk as to costs. I do not consider that I should make an order which gives Inder a considerable advantage at the possible expense of Jat.[71]Accordingly, I have reached the conclusion that I should not make a pre-emptive order for an indemnity in favour of Inder. I now need to return to the question as to whether to permit Inder to continue a derivative claim, if he still wishes to do so without the benefit of a pre-emptive indemnity.[72]As explained earlier, this is a proper case for the court to permit Inder to continue a derivative action in relation to the sums of money paid to Torex, but not in relation to the transfer to Jat of Southgate B. Nothing which I have discussed in relation to the indemnity question affects that reasoning. Accordingly, I will grant Inder permission to continue the derivative action in relation to the sums of money paid to Torex.[73]I have power to limit the permission to Inder to defined stages of the litigation. In a case where the minority shareholder is to have the benefit of a pre-emptive indemnity out of the assets of the company, it would be normal to impose a limit of some kind; the permission is often restricted to the stages up to disclosure and inspection. However, where there is no pre-emptive indemnity the need for a limit is not so necessary. In the present case, I will not impose a limit. If I impose a limit, the parties may incur the further cost of another hearing. I consider it is better to impose no limit at this stage but to give both parties permission to apply for a review of the position in the light of events.

The result

[74]I will grant permission to Inder to continue the claim in relation to the sums of money paid to Torex but not in relation to the transfer to Jat of Southgate B.[75]I will not make an order which gives Inder a pre-emptive indemnity as to his costs out of the assets of the relevant company.[76]As agreed at the hearing, I will order that the claim be stayed for a period to allow the parties to pursue a mediation of the claim. The stay will be for a period of 3 months from the hand down of this judgment.

Cited in 19 later judgments

and 10 more of the most senior