Boston Trust Company Ltd & Anor (Trustees of Erutuf Trust) v Szerelmey Ltd & Ors [2020] EWHC 3042 (Ch)

“Mr Verhoef and his family are beneficiaries under a New Zealand trust represented by VOC Trustee Limited (“VOC”). Through that trust arrangement and his ownership of an English company called Warthog Investments Limited (“WIL”), Mr Verhoef and his family effectively hold a majority of the voting rights in each of the Operating Companies. For convenience, I refer to this compendiously as the “VOC/Verhoef” shareholding or stake. The ultimate ownership proportion in respect of the Operating Companies is roughly 1:2 in favour of Mr Verhoef, namely: 33.33% (Erutuf/Krause) / 66.67% (VOC/Verhoef) in respect of the First Defendant (“Szerelmey”) and Second Defendant (“Szerelmey GB”); and 26.20% (Erutuf/Krause) / 58.22% (VOC/Verhoef) in respect of the Third Defendant (“Szerelmey Restoration”).”

“It seems to me that in a minority shareholder's action, properly and reasonably brought and prosecuted, it would normally be right that the company should be ordered to pay the plaintiff's costs so far as he does not recover them from any other party. In all the instances mentioned the right of the party seeking indemnity to be indemnified must depend on whether he has acted reasonably in bringing or defending the action, as the case may be: see, for example, as regards a trustee, In re Beddoe, Downes v. Cottam [1893] 1 Ch. 557. It is true that this right of a trustee, as well as that of an agent, has been treated as founded in contract. It would, I think be difficult to imply a contract of indemnity between a company and one of its members. Nevertheless, where a shareholder has in good faith and on reasonable grounds sued as plaintiff in a minority shareholder's action the benefit of which, if successful, will accrue to the company and only indirectly to the plaintiff as a member of the company, and which it would have been reasonable for an independent board of directors to bring in the company's name, it would, I think, clearly be a proper exercise of judicial discretion to order the company to pay the plaintiff's costs. This would extend to the plaintiff's costs down to judgment, if it would have been reasonable for an independent board exercising the standard of care which a prudent business man would exercise in his own affairs to continue the action to judgment. If, however, an independent board exercising that standard of care would have dis- continued the action at an earlier stage, it is probable that the plaintiff should only be awarded his costs against the company down to that stage. There is a well estab1ished practice in Chancery for a trustee who has it in mind to bring or defend an action in respect of his trust estate to apply to the court for directions: see In re Beddoe, Downes v. Cottam [1893] 1 Ch. 557. If and so far as he is authorised to proceed in the action, the trustee's right to be indemnified in respect of his costs out of the trust property is secure. If he proceeds without the authority of an order of the court, he does so at his own risk as to costs. It seems to me that a similar practice could well be adopted in a minority shareholder's action.”

“The principle which underlies this decision is reasonably simple and, I think, is clear. I will first enunciate it in the terms which counsel for the Plaintiff used in his opening, and the principle is this: would an honest, independent and impartial board of Withers in the circumstances disclosed in the evidence before this court consider that it was in the interest of the company to pursue down to discovery and inspection claims which Jaybird were pursuing as a minority shareholder in Withers? If the answer to this question is yes, then counsel for the plaintiff said the court should give the relief sought down to the close of discovery and inspection”

“The relevant alternative remedy in the present case is an unfair prejudice petition under section 994. From the point of view of the company itself a petition under section 994 is far preferable, principally because it will only be a nominal party and will not incur legal costs; whereas in the ordinary way if a derivative action is brought for its benefit it will be liable to indemnify the claimant against his costs, even if the claim is unsuccessful: Wallersteiner v Moir (No 2). At this point I should mention briefly the decision of Walton J in Smith v Croft [1986] 1 WLR 580. Mr Todd relied on it for the proposition that a claimant must demonstrate a genuine need for an indemnity before the court will order one. However, that is not what Walton J said. In Smith v Croft Walton J was concerned with two appeals from the Master. The first appeal was from an order made ex parte ordering the company to indemnify the claimant against costs. The appeal against that order was allowed, and Walton J decided that there was so little substance in the claim that no indemnity was appropriate. The second appeal was against an order permitting the claimants to tax their bills at intervals, without waiting for the outcome of the action. It was in the context of the second appeal only (i.e. whether there should be an interim payment on account of costs) that Walton J said: “Early payment — i.e. before the conclusion of the trial — does indeed impose an additional liability. That may become necessary: if, for example, the plaintiff is a person who literally has no resources of his own, then it may well be that an order for interim payment should be made in order to ensure that the action proceeds at all. Without the supplementary order, the original order may stand in danger of being stultified. It therefore appears to me that in order to hold the balance as fairly as may be in the circumstances between plaintiffs and defendants, it will be incumbent on the plaintiffs applying for such an order to show that it is genuinely needed, i.e. that they do not have sufficient resources to finance the action in the meantime. If they have, I see no reason at all why this extra burden should be placed upon the company.”

“As we have explained, the rationale of indemnification in respect of the expenses of litigation, as between trustees and the trust estate, or other fiduciaries and those on whose behalf they are acting, is that the party who has incurred the expense has not been acting for his own benefit but for the benefit of the estate or person in question. A minority shareholder who brings derivative proceedings on behalf of the company is ordinarily entitled to indemnification because the same rationale applies. We can understand that, on the facts of cases such as Mumbray or Halle, the view may be taken that derivative proceedings are inappropriate, on the basis that the shareholder is in substance acting for his own benefit rather than for the benefit of the company and should therefore pursue an alternative remedy. Where however the court has decided that a shareholder should be allowed to bring proceedings in the interests of the company and on its behalf, it appears to us to follow that the shareholder is in principle entitled to be indemnified by the company in respect of his expenses and liabilities (subject to the qualifications which we have previously mentioned), and that his personal interest in the outcome, as a shareholder, is not a good reason for denying him that indemnity.”

“In that regard, the argument which was presented to us (but not to the Lord Ordinary) was that it was inequitable that a shareholder who owned 40 per cent of the share capital of a small company should be allowed to bring proceedings against the other principal shareholder (who, with his wife, owned the remaining 60 per cent) at the expense of the company: even if the petitioner was unsuccessful in the derivative proceedings, Mr Black and his wife would effectively pay 60 per cent of the petitioner’s expenses. We note that a similar argument was rejected in Jaybird Group Ltd v Greenwood. Reliance was however placed on Halle v Trax BW Ltd [2000] B.C.C. 1,020, where Sir Richard Scott V.-C. dismissed an appeal against a decision refusing to grant a costs indemnity. The Vice-Chancellor did so in the light of the unusual facts of that case, noting (at page 1,023) that the critical feature of the case was the relationship in the company of its two shareholders, each of whom owned 50 per cent of the shares, and one of whom wished to bring a derivative claim alleging wrongdoing by the other. As the Vice-Chancellor observed, the claimant was not a minority shareholder and the alleged wrongdoer was not in control of the company: the action was treated as being essentially a dispute between two partners. The respondents also founded on an obiter dictum in the case of Mumbray v Lapper [2005] EWHC 1152 (Ch); [2005] B.C.C. 990, where the facts were similar to those of the Halle case. It was acknowledged that the facts of the present case were of a less extreme character.”

“The second case is Bhullar v Bhullar [2015] EWHC 1943 (Ch); [2016] B.C.C. 134. This was an action by a minority shareholder as a double derivative common law claim. Morgan J reviewed all the authorities including Wallersteiner v Moir, Iesini, Wishart and Halle v Trax. His conclusion is accurately summarised at [5] of the headnote ([2016] 1 B.C.L.C. 106): “The claimant was granted permission to continue the derivative claim in relation to the payments made to Torex, but not in relation to the transfer of the property. However, he was not entitled to a pre-emptive order granting him an indemnity as to costs. The court’s power to make such an order was established by Wallersteiner v Moir (No.2) [1975] 1 All E.R. 849; [1975] Q.B. 373 but the later authorities showed 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, it could not. Furthermore, the derivative proceedings were a stepping stone towards a negotiation for a formal split between the parties or s.994 of the Companies Act 2006 proceedings. The costs position in relation to the derivative proceedings should be the same as the costs position in relation to s.994 proceedings generally, when both the claimant and the first defendant would be on risk as to costs. The claimant should not have a pre-emptive indemnity which gave him a considerable advantage at the possible expense of the first defendant.” “The claimant was granted permission to continue the derivative claim in relation to the payments made to Torex, but not in relation to the transfer of the property. However, he was not entitled to a pre-emptive order granting him an indemnity as to costs. The court’s power to make such an order was established by Wallersteiner v Moir (No.2) [1975] 1 All E.R. 849; [1975] Q.B. 373 but the later authorities showed 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, it could not. Furthermore, the derivative proceedings were a stepping stone towards a negotiation for a formal split between the parties or s.994 of the Companies Act 2006 proceedings. The costs position in relation to the derivative proceedings should be the same as the costs position in relation to s.994 proceedings generally, when both the claimant and the first defendant would be on risk as to costs. The claimant should not have a pre-emptive indemnity which gave him a considerable advantage at the possible expense of the first defendant.”

“In other words, the companies here have no substantive continuing purpose other than to be wound down for the benefit of their shareholders. In these circumstances, while it is true that the claims are for the benefit of the companies, the dividing line between benefit to the companies and benefit to Mr Matyas as a shareholder is far less obvious that it might be in other cases. I consider the approach to be followed is that identified in Halle v Trax and Bhullar v Bhullar: can I be confident that the court would at the end of the proceedings – and whatever the outcome – burden the companies and thus, to the extent that he is a 50 per cent shareholder, Mr Wojakovski with the costs of pursuing them? As to this, if Mr Wojakovski were to succeed, I find it virtually impossible to conceive the court would consider burdening any part of his interest in the companies with the costs of pursuing the claims against him. It would, to adopt the language of the Vice-chancellor in Halle v Trax, be quite wrong.”

“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.”