Arrow Nominees Inc & Anor v Blackledge & Ors

The court may strike out proceedings where continuing litigation fraud creates an unacceptable risk of an unsafe judgment or prevents the court from doing justice. Strike-out protects the administration of justice rather than punishing misconduct. Fairness includes proportionate expenditure of time and money and proper regard for other litigants’ demands on court resources. The possibility of trying some remaining issues fairly is therefore insufficient by itself to justify continuation. A co-claimant cannot preserve an inseparable claim founded on the same compromised evidence. In unfair-prejudice proceedings, commercially adverse conduct by a shareholder acting as supplier or lender does not itself constitute unfair conduct of the company’s affairs. An abuse of corporate powers, an applicable agreement or an equitable restraint must be established.

Arrow Nominees Inc and Lorraine Blackledge each held 24% of Bodycare (Health & Beauty) Limited. Blackledge plc held the remaining 52% and was owned by Graham and Margaret Blackledge. Nigel Tobias, Lorraine’s partner, controlled Arrow. All four individuals were directors, while Nigel and Lorraine managed the company’s business. Blackledge plc supplied its goods and provided finance.

The minority shareholders petitioned under section 459 of the Companies Act 1985, alleging breaches of an oral agreement and unfair restrictions on trading, finance and expansion. They principally sought to purchase the majority shareholding. Nigel fabricated documentary evidence and subsequently gave an untruthful account of the extent of his conduct.

Evans-Lombe J refused two applications to strike out the petition. Although the disputed agreement could no longer receive a fair trial, he considered that other unfair-prejudice allegations could proceed. He struck out the minority’s claim to purchase the majority shares and the majority’s cross-petition. He also refused injunctions preventing Nigel and Lorraine’s dismissal or removal as directors.

The majority appealed against the strike-out refusals. The minority cross-appealed concerning their proposed purchase, and Nigel and Lorraine appealed concerning the injunctions. A related application sought to restrain meetings pending that appeal. The central questions concerned the surviving unfair-prejudice case and whether the continuing litigation fraud required termination of the proceedings.

The strike-out appeal was allowed unanimously. The petition was struck out, the petitioners’ cross-appeal failed and the appeal concerning the refusal of employment and directorship injunctions was dismissed. Chadwick LJ gave the principal reasons. Ward LJ expressly agreed and added reasons concerning the Civil Procedure Rules; Roch LJ agreed.

1. Per Chadwick LJ, section 459 of the Companies Act 1985 concerned unfair conduct of the company’s affairs. Applying O’Neill v Phillips [1999] 1 WLR 1092, unfairness ordinarily required breach of agreed terms or conduct contrary to traditional equitable principles. A shareholder’s commercially adverse decisions as supplier or lender were insufficient by themselves. The alleged surviving case required evidence that corporate powers had been abused to benefit Blackledge plc at the company’s expense. No such evidence remained once the disputed agreement allegations were excluded. The petition should therefore have been struck out on that ground.

2. There was an independently sufficient ground for strike-out. Per Chadwick LJ, discovery rules secured a fair trial rather than punishment for disobedience. Nevertheless, the court should refuse further participation where misconduct jeopardised trial fairness, made a favourable judgment unsafe or prevented justice through an abuse rendering further proceedings unsatisfactory. Nigel’s continuing deception had diverted the trial into investigating forged and destroyed documents. Fairness included avoiding undue expenditure and respecting other litigants’ claims on finite court resources.

3. Per Ward LJ, the discretion under the Civil Procedure Rules had to give effect to the overriding objective. The possibility of a fair trial of remaining issues was a weighty consideration, but it was not the sole consideration. Equality, expense, proportionality, expedition and allocation of resources also required proper weight. The sophisticated and continuing fraud justified strike-out despite the substantial interests the petitioners stood to lose.

4. Per Chadwick LJ, forged documents could contaminate honest witnesses’ recollections and evidence prepared from them. Lorraine’s claim could not proceed separately because both petitioners sought relief on identical facts and faced the same risk of an unsafe judgment. Her decision to continue jointly after advice about separate representation reinforced the absence of injustice.

5. The correctness of the first strike-out refusal was left undecided. As case-management guidance, Chadwick LJ suggested considering whether full disclosure of admitted documentary fraud should be investigated before trial, with cross-examination where necessary.

6. The injunction refusal disclosed no error of principle. No established agreement or other restraint justified preventing the majority from controlling board composition or the directors from deciding who should manage the business. The appeal was allowed with costs on the standard basis. The existing injunction continued in amended form; remaining issues, including possible personal costs against Nigel, were deferred. Permission to appeal was refused.

• Court of Appeal (Civil Division): In [2000] EWCA Civ 200 , unanimously allowed the appeal against refusal to strike out the petition. The petitioners’ cross-appeal failed and the appeal against refusal of injunctions was dismissed. The correctness of the first strike-out refusal was not determined. Permission to appeal was refused.
• High Court, Chancery Division: Evans-Lombe J dismissed the first strike-out application on 2 November 1999. In the judgment handed down on 24 January 2000, he refused the renewed strike-out application, struck out the petitioners’ claim to purchase the majority shareholding and struck out the respondents’ cross-petition. On 26 January 2000, he refused injunctions restraining dismissal and removal from office. There was no appeal against dismissal of the cross-petition.